Bund curve inverts. Modest inroads for GOP.
OVERNIGHT NEWS
# Dollar consolidates after three days of losses, 10y UST stable above yesterday’s close of 4.12%. S&P futures -0.2%. Republicans on course to win back the House, Senate on a knife edge, no Red wave.
# Day ahead: Fed speakers Williams and Barkin, ECB’s Elderson, BoE’s Haskel and Cunliffe. CPI for Mexico and Russia. Poland CB SG forecast unchanged at 6.75% vs cons +25bp. Bond auctions from the US, Germany and the UK.
# China CPI slows more than forecast to 2.1% in October from 2.8%. Food prices moderate to 7.0% vs 8.8%. PPI slumps to -1.3% (deflation). IIF estimates non-resident outflows of $8.8bn from Chinese markets (debt + equities) in October.
# Japan trade deficit narrows to ¥1,759.7bn in September, current account surplus widens to Y909.3bn. Cabinet approves ¥29.1tn ($198bn) extra budget to ease inflation impact on households and companies.
# Nikkei -0.5%, EUR 10y IRS -5bp at 3.0%, Brent crude -0.4% at $95/b, Gold -0.2% at $1,712/oz.
Bund curve inverts, flags recession threat
COP – COP is the best performer in the Latam region. Our local trader Santiago Calvache notes inflows in NDF and cash in the morning session. October consumer confidence index surprised to the downside at -19.5 (BBG Survey. -16.0, prior -11.5)
COP is a clear outperformed as well. The currency pared back Monday’s losses, and USDCOP crossed the key 5,000 level to trade at 4976 at print. With no new developments overnight – we continue to think the outperformance is related to lower volumes – the next level we are watching is 4628 – the 50d MA.
Daily Macro FiX (8 Nov): Dollar drawdown redux
By Ebrahim Rahbari, Brian Levine, Rajkaran Singh, Austin Fan
- Dollar drawdown: Investors continued to cut long USD positions as we suggested on Sunday. We still expect renewed Dollar strength, but a low US CPI print on Thursday could extend the recent correction, so we prefer awaiting its passing to re-enter USD longs.
- Today in brief: Dovish BoE, higher German debt issuance, high NZ inflation expectations, Brazil assets, and crypto sell-off and gold bounce.
- Tonight: we saw US mid-terms as slightly positive for risk sentiment, and first indications should be available late on Tuesday US time. We don’t see major market impact, but qualitatively the lack of additional fiscal stimulus should dampen US rates and support risk sentiment, with minor pass-through to USD.
- Tomorrow: Fed speakers (Williams, Barkin, Kashkari), BoE speakers (Haskel, Cunliffe), ECB’s Elderson, RBA’s Bullock, 10y US Treasury auction
In focus: Can’t miss the Dollar turn (?)
We think the ongoing Dollar correction is linked to concerns over Dollar downside risk, particularly if US CPI on Thursday comes in low. Given that downside potential we think it’s risky to buy the dip yet, even as we see further Dollar strength over time.
Historic. The Dollar weakened for the third consecutive day as BBDXY closed 0.4% lower today. The correction has been broad-based (our USD breadth indicator fell to –5, lowest since 10/27) and historic in magnitude: the three-day drop in BBDXY (2.4%) is the third largest 3d decline in the past decade (!) and largest since March 2015.
Fear. We flagged into the week that investors may be reluctant to add long USD risk in light of China uncertainty and Friday’s sharp sell-off. Indeed, our sense is that investors continue de-risking following recent China optimism and ahead of US CPI, where our economists expect a below-consensus core print (0.4% M/M). A CPI undershoot on Thursday would likely weigh further on USD.
More broadly, we have recently noticed that many investors argue that we are in the final innings of Dollar strength and Fed tightening (pricing fell across the OIS curve on the day, with December pricing and the terminal rate sitting at 58bp and 5.1%, respectively). Real money investors continue to extend USD short positions according to our positioning indicators (–5.0 vs –3.7 last week), while our trading desk observed hedge fund USD selling vs CAD and GBP today. USD risk reversals are also less bid for USD, taking them back to mid-September levels, in line with the sentiment of limited USD upside.
- Our desks further points to the rally in USTs as driving Dollar weakness, with US 2/5/10y yields down 7/9/9bp today. In the Eurozone, hawkish ECB headlines (front-end OIS pricing rose slightly, with Dec/Feb ECB pricing up 0.8bp and 1.5bp, respectively) and headlines that gas storage is full collectively supported EUR. However, Dollar weakness was broad-based today vs high-carry, cheap Latam currencies (CLP, COP, PEN), JPY (in light of the global rates decline) as well as European FX.
Over the medium-term, we continue to see higher US yields, pressured risk assets, and weak global growth as Dollar-supportive factors. But shorter-term, we see room for the correction to run, particularly if core CPI prints in line with our economists’ expectations.
Awaiting mid-term elections. We note potential risks around delayed reporting of midterm election results. In this respect, we observed that the Dollar continued weakening around the 2020 presidential election despite heightened uncertainty over the results (though hit a local trough around the January 6th protests in response to the election outcome).
| Latest 3d decline in BBDXY is third largest over last decade | Our USD breadth indicator has fallen back to late October levels |
Latin America:
Latam currencies had a strong trading session, low-yielders led regional gains. COP was the region’s best performing currency, with 2.83% appreciation to consolidate below the 5,000 psychological level at ~4974; we attribute the move to a re-adjustment in positioning (market participants likely squared some long USD positions, which benefitted COP, given recent bearish sentiment and a sharp sell-off). CLP gained 1.4%, as a downside surprise in October CPI led to a sharp rally in rates (1y CLPxCAM closed 83bp lower at 9.95%). BRL continued to lag peers as uncertainty about upcoming cabinet appointments prevailed and the currency closed only 0.28% stronger against USD. In Brazil, DI rates also continued to underperform; January 2031 DIs closed 13bp higher at ~12.00%.