OVERNIGHT NEWS
* EUR/USD backs off 1.20, yields decline after ECB’s Lane says currency’s valuation “does matter”; euro inflation dropped to -0.2% in August; hammer candlestick pattern in DXY points to possible trend reversal
* Fed’s Brainard (2020 voter, centrist) says continuous fiscal/monetary support will be needed “in coming months” as economy faces considerable uncertainty; Treasury Secretary Mnuchin says ready for additional stimulus package of up to $1.5trln
* Australia 2Q GDP contracts 7.0% qoq saar, -6.3% yoy, marks first recession since 1991; AUD/USD -0.25% at 0.7350
* S. Korea CPI edged up from 0.3% to 0.7% yoy in August, fresh food prices rose 16%; USD/KRW +0.3% at 1,186
* Chile CB keeps policy rate unch at 0.50%, reiterates plan to maintain strong monetary stimulus for a prolonged period
* Nikkei +0.47%, EUR 10y IRS -1bp at -0.17%, Brent crude +0.7% at $45.9/b
Euro area returns to deflation for first time since 2016
Sunny sentiment can be seen in equities today, with S&P 500 futures suggesting new record highs are on the cards. An impressive ISM manufacturing print, and supportive central banks are helping. ADP today will also anchor expectations for Friday’s NFP. In this environment, the USD is finding some reprieve with price action clearly exacerbated by a squeeze in short USD positioning. EURUSD remains below the 1.19 handle while AUD was also weighed by a Q2 GDP miss. We think price action is symptomatic of a squeeze, and believe the USD downtrend will resume soon enough.
Central bank speakers should be in focus today after Fed’s Brainard and ECB’s Lane yesterday. Williams, Mester and Weidmann could offer a relatively hawkish tone while NZD benefitted from Orr’s benign comment on FX. GBP should also stay tuned to the BoE, while CLP saw a slight hawkish tweak from its central bank
Reviewing the rallies yesterday:
· COP: Our trader observed RM inflows dripping in yesterday. Some of that could be linked to index rebalancing, or just some hedges being taken off. That being said, the move has been particularly brutal with very little natural demand and market makers not looking to keep any dollars on the books. The lack of liquidity exacerbated the move.
· BRL sees our trader explains that BRL rallied on a range of news regarding social programs and reforms with Bolsonaro on the wires. Most importantly, this shows that Bolsonaro and Guedes working together and aligned on the same target, so concerns seem to be alleviated for now. Our trader remains concerned about the fiscal situation though: B
Asian stocks traded mixed overnight; Nikkei +0.5%, Kospi +0.6%, ASX +1.8%, Hang Seng
-0.2%, SHCOMP -0.2%. US futures are moderately higher while European equities are
rallying, with SX5E, CAC, and DAX up 2.5%.
Strong manufacturing PMIs helped validate, at least partly, the risky asset recovery, later
today we see the release of Durable goods orders and the Fed Beige book which will provide
some more clarity on the economic views of each Federal Reserve District.
Comments from ECB’s Lane last night outlined that while FX is not a price target, the
EURUSD rate does matter for ECB policy. While we know FX can have a significant impact
on inflation and growth, this is the first official comments on the matter in a long time.
Strategy: While we don’t have any directional trade on
Colombia, we are long COP with USD6.75mn allocation
(10.3% of total) in our Long EMFX basket position, which
we recently increased. See our publication for the details:
EMFX basket changes: Adding risk in undervalued
currencies.
El repunte de las divisas de LatAm genera expectativas de flujos
En las últimas semanas, la mayoría de divisas de LatAm ha tenido dificultades para avanzar de forma significativa
frente al USD debido a que los inversores han mantenido un enfoque de cautela. Aunque el USD se fortaleció
respecto a muchas otras divisas del G10 el martes, LatAm consiguió avanzar gracias a que el sentimiento por el
riesgo global mantuvo el signo positivo. Los movimientos de precios sugirieron un cierto impulso del apetito por el
riesgo hacia los mercados emergentes. Aunque la región sigue careciendo de su tradicional atractivo de carry,
posee aún un cierto margen de recuperación, ya que los negocios locales reabren y la actividad económica
repunta gradualmente, abriendo la puerta a un optimismo cauto y selectivo a corto plazo.
El COP prosigue con su recuperación
El martes, el COP registró su quinto día consecutivo de repunte al avanzar alrededor de un 1,7%. Con los precios
del petróleo atascados en fase de consolidación, la correlación entre el Brent y el COP ha sido baja. En cualquier
caso, desde su mínimo reciente de finales de agosto, la divisa ha recuperado alrededor de un 5% gracias a la
reanudación de la tendencia bajista del USD. Aunque el COP ha ido a la zaga durante gran parte del 3T, aún
dispone de margen para tomar cierto impulso a corto plazo si la tendencia de riesgo externo positivo continúa. A
medida que el atractivo de los bonos gubernamentales locales crece desde un punto de vista táctico, el COP
podría también ganar tracción en el futuro inmediato si los flujos de cartera mejoran, lo cual reforzaría
momentáneamente la resistencia del USDCOP en alrededor de 3.780.