COP – COP’s rally in June was brought to a halt today as COP depreciated 2.2% against the dollar. Our local trader saw flat RM flows with HF and locals selling COP to take profit. However, the local trading desk thinks that this move is unjustified and would like to sell the pair at current levels as there is no major driver behind.
NY Open – Get ready
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The FI complex is bid, equities are under pressure, and the FX complex is mixed as we begin a catalyst heavy week. Bunds are rallying as Germany IFO data reiterates weak trends set by latest PMI prints, while USTs are also higher, though EURUSD remains around the 1.09 handle. Overnight, FX intervention comments and month-end stock rotations pushed USDJPY towards 143 (the move also helped by lower US yields), while USDCNH is picking up its rally towards strong resistance coming at 7.25-7.26. Greece’s former PM Mitsotakis won second-round elections on Sunday, gaining an absolute majority in parliament. There’s no notable US data on the cards today, so USTs moves will be a function of broad market drivers. ECB’s Sintra forum begins today with ECB President Lagarde’s welcome remarks at 13:30 EDT, various ECB speakers as well as a slew of other global central banks feature from Tue-Wed. SNB’s Maechler may reiterate Governor Jordan’s hawkishness over the weekend at 10:25 EDT. In EM, USDTRY extends its rally, the CBT announced further easing of current FX regulations. For BRL, the BCB focus survey releases shortly at 07:25. CLP markets are on local holiday |
We continue to hold many of the same views. We like the dollar, think that rates can come lower and are neutral on credit. However, the ramp-up in DM climate finance is an important positive for credit, particularly for HY.
FX & EM Strategy: We continue to promote a bullish USD view. The recent focus on AI and the outperformance of tech stocks benefits USD, though the medium-term implications for productivity differentials remain to be seen. Last week’s flash PMI data should support USD too.
LatAm Macro Strategy: We explore the importance of US rates for LatAm receivers at current levels, as regional rate spreads versus the US are starting to look a bit tight, particularly in Mexico and Chile. However, we would not recommend paying rates here versus the US, as we see room for LatAm curves to continue adjusting lower once we get more clarity on the FOMC path (potentially around the July meeting). We stay received 2-year COPxIBR, Jan 26 DIs and 5-year TIIE. We also stay long 2033 NTN-Bs, June 2027 MBonos, BRL/COP and USD/CLP.
COP Long BRL/COP: COP valuations now look expensive from both a
REER standpoint and from a risk premia perspective and we would
expect a tactical pullback at current levels. We like to short COP
versus BRL, given more attractive carry and valuations.
Receive2-year COPxIBR: Colombia’s priced in easing cycle is the shallowest
in the region, but our economists expect BanRep to start cutting rates in
October this year (ahead of Banxico) amid some incipient downside
surprises in CPI, strong FX and significantly reduced political risk premia.
This backdrop should be supportive for 2-year receivers, in ourview, where
carry costs remain manageable (~70-80bp over three months), especially
given that we expect the gains to materialise over the next few weeks, rather
than the next three months.
Colombia Buy COLOM30 and buy COLOM5Y CDS: Colombia should trade cheap versus peers due to political and double deficit risks,
with fiscals in particular unlikely to improve from here and more issuance on the way with about US$1.5-2 billion possible in
2H23. However, at three downgrades this cheapness is also already priced and we think that valuations closer to 2.5
downgrades are reasonable, which means 50bp wide to BBs instead of the current 90bp. For now the bonds look cheap to the
CDS