Manic Monday: UK tax U-turn, Brazil election suspense
OVERNIGHT NEWS
# Sterling leads G10 rebound vs USD after UK government U-turns on 45p tax rate, 10y Gilt -5bp to 4.03%, IRS -7bp to 4.37%. S&P lowered UK AA rating outlook to negative from stable.
# Week ahead: US ISM today, NFP on Friday. ECB accounts on Thursday. UK Tory Party conference until Wednesday. CB decisions on Wednesday in NZ (cons +50bp), Romania (cons +50bp), Poland (SG f/c+25bp). China PMI and Mexico CPI on Friday.
# Japan: 3Q Tankan large manufacturing surprisingly drops a tick to 8 from 9 in 2Q, outlook slips to 9. Services improve to 14 but outlook deteriorates to 11 from 13. Companies raise FY22 USD/JPY estimate to 125.71 from 118.96, EUR/JPY 134.15 vs 131.60.
# Brazil: Presidential races goes to runoff on 30th October after Lula won 48% and Bolsonaro 44% in round one yesterday.
# CFTC positioning: EUR longs rise marginally to 5.2% of OI. GBP shorts cut to 16.5%, JPY shorts upped to 33.7%, AUD shorts reduced to 22.8%, CAD positioning flips to short 12.5% OI, CHF shorts trimmed to 12.9%, MXN shorts jump to 23.9%.
# Nikkei +1.1%, EUR 10y IRS +2bp at 3.10%, Brent crude +2.4% at $87.2/b, Gold +0.2% at $1,663/oz.
EUR/USD – options brace for a volatile start to October
CitiFX Wire Market Commentary – FXLM – Intended for Institutional clients only
Tough times ahead for COP
COP FX is having a tough end to its week. Price action and flows reflect Banrep’s disappointing rate hike Thursday. USDCOP is likely to trade higher from here, though we would need to see a weekly close above 4600 to cement that likelihood.
USDCOP is chopping around 4600, having previously broken north of it before reversing a touch lower to 4595 at print. The price action now starkly stands out within the Latam complex, as other USDLatam pairs trade relatively unchanged on month-end and some improvement in broader risk sentiment. Our trader points out that the rates market seems to be buying Banrep’s narrative of a more dovish tone. Rates have pulled back the terminal rate, with yields retracing across the curve. This dynamic is weighing on COP FX and supporting flows from both real and fast money names that influence FX price action further.
Citi EM Strategy added COP underweight exposure to its EM bond portfolio, following Thursday’s dovish decision. It maintains its call for another 100bp hike in the current tightening cycle but acknowledges that the downward growth outlook revisions and the notable 6-1 split for a 100bp hike in this Thursday’s meeting skew risks for a smaller hike(s) ahead. COP FX may still be the cleanest way to express dovish expectations, especially in an environment that will likely see broad USD strength medium-term. Our trader adds that fundamental idiosyncrasies also suggest more weakness for COP ahead.
USDCOP may chop around 4600 intraday, though a weekly close above that level could suggest a retest of recent highs at 4660. Support remains at 4550.
We maintain USD longs versus select AXJ low yielders such as PHP, THB and TWD, but we also recently added a long USD/COP position as a play on BanRep’s dovish turn despite challenged external accounts and inflation prospects.
Long USD/COP 29-Sep-22 4560 4755 4410
Colombia’s twin deficits make COP extremely vulnerable to tighter global financial conditions and we expect a
relatively more dovish central bank (relative to market expectations) to exacerbate this sensitivity. We note
that real rates in COP remain relatively lower compared to peers such as BRL and MXN and the currency also remains exposed to a weaker CNH (given REER weight).
A dovish Fed boosting risk sentiment and causing USD to pull back.
We also added a recommendation for long USD/COP positions, as we think that BanRep’s latest dovish pivot (amid a very wide current account deficit) is a bit premature and similar to the early pivots by the BCCh which exacerbated the sensitivity of CLP to external conditions; we think that the price action in COP should be similar.
Open FX trades: Long USD/PEN (target: 4.18), long USD/COP (target: 4755), long BRL/ZAR (target: 3.55), short CLP/MXN (target: 1.94).
We also added a recommendation for long USD/COP positions, as we think that BanRep’s latest dovish pivot (amid a very wide current account deficit) is a bit reminiscent of Chile’s two dovish pivots from earlier this year (one in March and one in June). In the case of Chile, the dovish pivots exacerbated the currency’s sensitivity to external conditions each time (given Chile’s very wide current account deficit), and we think that the price action in COP should be similar.
| COP | Dislike: Long USD/COP: We think that BanRep’s latest dovish pivot (amid a very wide current account deficit) is a bit reminiscent of Chile’s two dovish pivots from earlier this year. In the case of Chile, the dovish pivots exacerbated the currency’s sensitivity to external conditions each time (given Chile’s very wide current account deficit) and we think that the price action in COP should be similar. | Dislike: We maintain a paid bias across the IBR curve and we think that BanRep’s dovish pivot should be faded. Ultimately, we think that external conditions as well as Colombia’s own CPI profile are likely to keep upward pressure on the front end of the curve, similar to Chile’s dovish episodes. We note that Colombia has the second-highest deviation of CPI from target in LatAm, and the 100bp hike barely offset the latest increase in 12-month CPI expectations (~100bp) from a real rates standpoint |
