OVERNIGHT NEWS
# Dollar and bond yields firm before FOMC, UST 10y up to 1.63%, +10bp since Friday, 10y break-even climbs to 2.40%, 8-year high
# Australia 1Q CPI +0.6% qoq and 1.1% yoy, below forecast of +0.9% and 1.4% yoy; AUD/USD -0.3% at 0.7745
# OPEC+ maintains plan for gradual output hikes over next three months (+2mbpd May to July), skips today’s ministerial meeting
# Day ahead: FOMC expected to leave FF rate at 0-0.25% and QE pace unch at $120bn pcm, too soon for taper guidance
# Nikkei +0.2%, EUR 10y IRS +3bp at 0.125%, Brent +0.4% at $66.7, Gold -0.5% at $1,769/oz
Fed on hold today, consensus for tapering converging on 4Q
It was a typically muted trading session overnight, as market participants practice patience into the FOMC. CitiFX Strategy expect the FOMC to mostly stay the course, acknowledging a more positive outlook without sending new policy signals. However it is understandable for markets to go into the event cautiously, given hawkish risks, so there was a marginal bias for steepening and USD strength overnight.
Elsewhere, the White House released the details for Biden’s address to Congress tonight. The tax proposals were largely in line with expectations, though the headline price tag was larger than expected. Therefore US equity futures trade close to flat. There was only modest divergence in FX, with INR and TRY continuing to trade well, while AUD seeing a Q1 CPI miss.
Looking into Latam:
· COP remained under pressure on Tuesday.
– USDCOP eyes resistance near the YTD peak of 3755.00, while support is seen at the 200d MA at 3650.00.
– The tax reform continues to attract controversy. Labor unions, workers and students will be protesting today.
· CLP: The Constitutional Court voted 7 to 3 against President Pinera’s pension withdrawal bill request. Therefore Pinera confirmed on Tuesday that he will enact the legislation and sign it today.
· BRL: Note that Senate began the inquiry into the government’s management of the Covid-19 situation on Tuesday. However the investigation is likely to last months, so we do not envisage any near term headline risks. Nevertheless, the political landscape remains an unknown driver of Bolsonaro’s policy options as we look to next year’s presidential elections.
COP woes persist
COP remains under pressure into the Tuesday session after experiencing a salvo of outflows Monday. The peso trades -0.6% weaker as of writing towards 3714.00. Earlier price action saw spot shift as high as 3730.00 before gradually fading lower. USDCOP eyes resistance near the YTD peak of 3755.00, while support is sighted adjacent to the 200d MA at 3650.00.
Headwinds continue to revolve around tax legislation uncertainty, and a worsening COVID situation.
· On the former, we outlined in our previous note that support across the political spectrum remains scarce. Our trader expects that the negotiation process for a final agreement can potentially extend months into the future. Improved tax legislation has been considered a lynchpin for mitigating risks of sovereign credit downgrades.
· Daily new COVID cases remain elevated (Figure 1), and eclipsing the record established in mid-January. However, the latest slate of lockdowns might serve to gradually ease spread albeit with reduced activity throughout the country. Restrictions are expected to be reviewed on a rolling basis, with the latest protocols to last until Monday May 3.
· The above considerations might also serve to limit hawkish sentiment going into Friday’s central bank meeting. Citi Economics and consensus expect the policy rate to remain unchanged at 1.75%. Recall, the CB board shifted its stance last meeting by voting unanimously to keep rates on hold after two board members had opted for cuts in recent policy meetings. The meeting likely indicates that a window for cuts has been closed. With that being said – inflation is at its lowest point this year, while expectations remain anchored around the target midpoint in the policy horizon. The team retains their view that rates will be left unchanged throughout 2021.
Figure 1: Daily cases bordering earlier January record
Risk assets tread water prior to Wednesday FOMC, Biden address; Treasuries lead core rates’ bear-steepening in NY afternoon as TIPS breakevens revisit multi-year wides; FOMC meeting, retail sales and confidence gauges ahead; US 10y at 1.622% (+5.5bp)
Latin America:
Currencies in the region traded mostly weaker alongside dollar strength and amid idiosyncratic risk events. MXN underperformed, depreciating 0.9%, to 20.0580, mostly driven by external market conditions as domestic headlines were more muted. Colombia followed, depreciating 0.6% despite strong oil price performance as fiscal concerns returned, this time driven by pushback from legislators on both sides of the aisle. In addition, Colombian unions were expected to protest the bill on Wednesday, supporting the political resistance the legislation witnessed in Congress. On the other hand, CLP strengthened 0.4%, to 702.33. This occurred amid an improved economic outlook from the government and as the constitutional tribunal (TC) rejected the government’s push to challenge the third AFP bill approved by Congress. Overall, the decision of the TC did little to impact the expectations regarding a third bill as the government had already proposed an alternative bill with a very similar withdrawal impact.
Un avance estable
Ayer, el USD cotizó de forma lateral frente al resto de divisas del G10 y registró avances frente al JPY y las divisas
de las Antípodas. El nuevo movimiento “bear steepening” en los tipos de los UST pudo contribuir a dicho
comportamiento, ya que el tipo a 10 años consiguió volver a situarse por encima del 1,60% y, desde entonces, el
repunte se ha prolongado durante la sesión asiática. Gran parte de la recuperación se debió al avance adicional en
las expectativas de inflación, donde el breakeven a 10 años alcanzó un nuevo máximo en ocho años al subir por
encima del 2,40%. Esto podría haber sido consecuencia del optimismo de la encuesta de confianza de los
consumidores estadounidenses, en la que las expectativas de inflación para el resto del año se estabilizaron en un
máximo en la década del 6,7%. Sin embargo, el USD no consiguió tomar demasiado impulso frente al EUR, y el
EURUSD siguió consolidando dentro de un rango de 1,2050/1,21.
La incertidumbre de la reforma fiscal debilita al COP
El COP volvió a vivir una sesión complicada y retrocedió alrededor de un 0,7%. El COP ha tenido serias
dificultades en los últimos días, en los que el proceso de reforma fiscal de Colombia se ha encontrado con
oposición en el Congreso y los tipos locales han mostrado debilidad. Aunque las agencias crediticias han
concedido más tiempo al gobierno, se espera que el proceso presupuestario sea complejo, y el riesgo de que la
propuesta de reforma termine diluyéndose es alto. Dado el alto grado de incertidumbre política y monetaria, el
actual entorno podría disuadir a los inversores por el momento. Por tanto, aunque mantenemos una visión
constructiva sobre el COP a largo plazo, las condiciones inmediatas de la divisa podrían seguir siendo débiles en el
futuro dada su tendencia a las reacciones asimétricas del mercado y su sensibilidad al USD.