OVERNIGHT NEWS
* Dollar set for lowest month close since April 2018 but fall-out of Fed strategy shift contained in bonds, UST 10y yields retreats to 0.70% from 0.78% high on Friday, 10y EGB drops back to -0.41% from -0.377% high
* SG FX [forecast update: https://doc.sgmarkets.com/en/3/0/0/260454.html?sid=9fe0674e63fc21aed8815f9f965ca67e]: EUR/USD raised to 1.2500 by 3Q21, GBP/USD raised to 1.35, USD/JPY at 100 EUR/GBP at 0.93, EUR/JPY at 125, EUR/CHF at 1.10, AUD/USD at 0.76 and USD/CAD at 1.29
* UK: Chancellor Sunak plans increase in corporate tax from 24% to 28% in November budget to fund ballooning public deficit, plans also under consideration to raise capital gains tax and reduce foreign aid spending (Sunday Times)
* China: Aug official mfg PMI fell from 51.1 to 51.0 and non-mfg PMI rose from 54.2 to 55.2; USD/CNY falls to 6.8449, 7m low
* Day ahead: Germany and Spain CPI; Fed’s Clarida; India 2Q GDP SG f/cast -20.8% yoy; Turkey 2Q GDP, cons -10.7% yoy
* CFTC FX positions: EUR net longs raised to 30.8% of OI, long CHF cut to 22.3%, JPY longs raised to 16%, RUB longs jump to 30.3%, GBP longs cut to 3.2%, AUD shorts rise to 3.1% and CAD shorts cut to 22.6%
* Nikkei +1.1%, EUR 10y IRS unch at -0.145%, Brent crude +2.3% at $46.1/b
Risk on in August: FX performance MTD vs USD
A mixed bag in terms of performance across the risk spectrum, with equities/futures for the most part trading in the green barring. In contrast, risky FX generally posted losses as a broad USD bid materialised in London – low liquidity could be at play with UK holidays today though. GBP, ZAR, KRW and MXN are the underperformers while CNH and RUB outperform. USDCNH as we go to print is testing strong support around 6.8457.
In terms of overnight drivers, China official PMIs were the main data point overnight – these came broadly in line with expectations and added to strong onshore sentiment, which may have helped the breaks in CNY/CNH. Otherwise, we look forward to Fedspeak today with Clarida and Bostic on the slate. EUR sees Germany CPI while in EM, we await INR GDP and a COP rate decision (25bp cut).
COP awaits a Banrep decision today (14:00 NY / 19:00 BST) where market consensus is for a 25bp cut. Citi Economics thinks this could be the last cut for the central bank as the board looks to pause. A full preview can be found here.
The week has gotten off to a quiet start with UK markets closed for a bank holiday. Equity
markets remain well supported, with the S&P futures up 0.3% and Euro Stoxx index up about
0.7%. The USD is mixed, slightly weaker vs. the EUR, with EURUSD back above 1.19, but
better supported vs. the JPY as USDJPY has pushed back up to 105.92. Brent crude is up
$0.67. On the data front, German state CPI numbers for August are running on the soft side
heading into the national preliminary estimate later this morning.
Ahead Monday, focus for global markets remains on reflation trades and downward pressure
on US real yields after last week’s Fed framework revision news. Data today includes the
preliminary German August CPI estimate at 8am ET, while US releases are limited to the
Dallas Fed survey at 10:30am ET. Fed Vice Chair Clarida will speak on the Monetary Policy
Framework at 9am ET, and there is some risk for markets that, in trying to clarify the new
policy, he downplays the extent that inflation will be allowed to run over target, as
Dallas President Kaplan did last week. Atlanta Fed President Bostic will also speak, at 10:
30am ET.
Month-end flows may dominate today’s price action, but important data will begin to roll in as
September gets underway on Tuesday and markets will be watching for any indications that
the summer Covid surge in the Western and Southern US and new waves in Europe are
taking a toll on the recovery. We expect the US manufacturing ISM (Tuesday) to hold at 54.0
and an above-consensus 2.25 million rise in August non-farm payrolls (Friday). Data in line
with our forecasts should be supportive for the risk environment but, with the Fed having now
communicated an intention to allow the economy to run hot, solid US data will be unlikely to
support real yields and could weigh further on the USD. Colombia’s central bank is expected
to deliver a further 25bp rate cut at 2pm ET
Latam policy rate decisions to take different action, but similarly in record lows regardless.
*Colombia’s BanRep is expected to cut rates by 25bp this Monday, likely to hint at no further
cuts as the rate will set at another record low of 2.00% pa – in a more tricky decision as the
board navigates a sinking currency and a widening current account deficit with a below target
inflation and a 17% drop in Q2 GDP. We think this will be the last move of this easing cycle.
Urban unemployment, the bank recently noted, remained high at unprecedented levels,
finishing July at 24% of the active workforce. Colombia scored the second worst in our BNP
Paribas Labour Market Resilience Index, only better than South Africa. Colombia’s labour
market was weak before the pandemic, with the unemployment rate combined with under
unemployment standing at 25% – and possibly reaching 40% of its workforce currently, by our
estimates.
El BanRep se encamina a recortar y el COP sigue teniendo margen para avanzar
La agenda local LatAm presenta una actividad importante y multitud de datos de inflación, pero gran parte de la
atención se centrará también en los bancos centrales. Es probable que, a partir de esta semana, el banco central
de Colombia (el BanRep) vuelva a recortar en -25 pb hasta un nuevo mínimo histórico de 2,00%. El pasado mes, el
Consejo votó unánimemente a favor de recortar el tipo de interés de referencia en el mismo porcentaje por
segunda vez consecutiva y dejó la puerta abierta a medidas expansivas adicionales. El impacto de la pandemia
continuó durante las dos últimas semanas, ampliando los efectos económicos y agrandando la brecha de
producción. Sin embargo, los miembros del Consejo también expresado preocupaciones y límites sobre el ciclo
expansivo, incluido el gobernador Echevarría, que planteó recortes adicionales más dependientes de los datos y
puso el foco en el impacto de los tipos reales negativos sobre la estabilidad y los flujos financieros. Por tanto, el
recorte no está totalmente garantizado y podría además suponer un final más formal a las medidas expansivas del
banco o, al menos un aumento de los requisitos para su aplicación y un incremento de las posibilidades de que se
tomen pausas. El COP ha mantenido su tradicional alto beta hacia el riesgo con algunas asimetrías (negativas)
relevantes que han enviado al USDCOP a una zona de venta próxima a 3900 durante las últimas dos semanas. En
nuestra opinión, este rango más amplio ofrece margen para que el cruce avance hacia 3635 si las ventas de USD
en los ME/LatAm ganan impulso y los flujos terminan por aumentar con la inclusión de algunos bonos locales
colombianos en los índices globales.