OVERNIGHT NEWS
# Dollar retreats as stocks zoom higher after Fed drops forward guidance, 2y/10 and 5y/30 bond curves bull steepen.
# Fed raised FF target by 75bp to 2.50%, neutral (upper end). FOMC highly attentive to inflation risks, will go meeting by meeting, watching the data, anticipates that ongoing increases in the target range will be appropriate.
# Day ahead: US 2Q GDP first estimate: SG forecast: +0.4% qoq SAAR. Germany preliminary CPI, Euro economic confidence, ECB speaker Visco, Hungary to align one-week depo rate with base at 10.75%, Italy and US bond auctions.
# Hong Kong raises key rate by 75bp to 2.75% following the Fed. HKMA Chief Executive Eddie Yue defends HKD-USD peg.
# Japanese investors bought ¥107.9bn of foreign bonds last week, marking return after eight straight weeks of net selling.
# Sweden 2Q GDP rebounds 1.4% qoq, (4.2% yoy) after contraction of 0.4% qoq in 1Q.
# Nikkei +0.4%, EUR 10y IRS +3bp at 1.79%, Brent crude +1.2% at $107.9/b, Gold +1.1% at $1,740/oz.
US economy forecast to avoid recession in 2Q
COP – COP performs strongly today fuelled by gains in oil prices and weaking USD post FOMC. Liquidity in USDCOP remains poor. We could see further retracement towards 4400 as soon as outflows slow down. In terms of flows today our local trader notes it has been a quiet day again with net outflows on the day. This week we are watching the BanRep decision Friday where 18 out of 25 survey respondents are expecting a 150bp increase.
JPY jumps, next levels
USDJPY has rallied by some 1.5% today, which we think reflects market focus shifting towards growth/recession probabilities and very light positioning in the pair. Price action has paused here ahead of support at 135.15 (5-month ascending support) as flagged by CitiFX Technicals. A breach through the 135 handle would take us lower to 134.27 (June 23rd low). Below there is support at 133.66 (55-day-MA).
We remind that CitiFX Strategist Takashima-san says that the Initial sign of peaking in USDJPY has emerged. The drop in USDJPY late last week confirmed a clear waning of its upward momentum since this spring, and a possibility has now emerged that USDJPY is peaking in the current cycle. At this time, we see the downside scope to extend to around 134 in this correlation phase. Such a near-term adjustment could potentially lead to a deeper fall over the medium to long term ultimately, although we don’t think this is an imminent risk.
EURJPY is probably driving the latest move seen in EUR with this move through 138 in light of limited upside risks to Germany CPI. CitiFX Strategy have been flagging that EURJPY: Greater downside risk than USDJPY and think the cross could decline to around 135. Before that, we may see some support around 136.90-137.56 where the 100d MA and July lows coincide. This may depend on how US data prints in the coming days.
Debatable
Overnight markets are partly pushing back on the initially dovish read of the FOMC, with more focus on what Powell said than the 75bps rate hike itself. While the US yield curve has retained a steepening bias, USD losses have been limited and US equity futures are trading modestly lower with earnings season in full swing. We remind that our economists had a more hawkish read on the FOMC than the initial market reaction and that data was a key point mentioned in the press conference. For today, we see US Q2 GDP at 08:30 EDT, where our economists expect the economy to avoid a technical recession (0.6%QoQ forecasted). We also have Jobless Claims at the same time, but ultimately we think Q2 ECI on Friday will be the bigger driver.
European FI was in focus overnight after a mixed bag of Germany state-level CPI prints. This comes ahead of nationwide CPI at 08:00 and overall Eurozone CPI on Friday, with overnight markets pricing in a more muted outcome. Alongside weaker EU economic confidence, this has weighed on European sentiment. Further gains in Latam may be limited, pending broader risk sentiment. Note that MXN unemployment rate and BRL FGV Inflation IGPM MoM for July are due shortly at 07:00 EDT. CLP BCCh minutes will be pushed later today while PEN/THB markets are closed on local holidays.
