IGM Credit, IGM FX and Rates
03 Aug 2020
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We have recently highlighted our view that USD weakness may be abating, see here, and while it hit a near 15mth low last Fri as bearish momentum shaped mth-end flows, Fed Fischer commented that political uncertainty is hurting US econ growth and more White House debacle, our conviction in the call for a steadying USD is starting to grow.
This is down to the o/n price action, where the USD briefly dipped after yet more soft US data but then rejected the downside move and bounced to eke out mild intraday gains.
UST yields diverges by falling hard o/n
UST yields saw a counterintuitive uptick post-data before sliding aggressively into the close as expectations of a 3rd Fed hike for 2017 fades.
The catalyst came from a drop in oil prices, soft US data and plunging auto sales in Jul that raises questions about broader consumer spending/a possible dip in durable goods orders/Q3 US growth weakness.
We still hold the viewpoint of a divergence reversal btwn UST yields and the USD
Note too that for USTs, beyond sluggish US data and the implication of a pause in Fed tightening, the lack of legislative success (another failed Obamacare repeal, no traction on tax/fiscal policies), the turmoil within the Trump administration, there's also the overhang of a looming debt ceiling negotiation and how it could descend into a disorderly govt shutdown.
That said, we continue to see limited downside for the USD, in what would be a reversal of the divergence seen recently.
One could pose the question of evidence of a capitulation of short-sellers to pinpoint a momentum change in the USD?
Note that while the USD will continue to trade soft against the Euro (ECB tapering speculation) and Yen (tracking UST yields), and it's still facing drag from the commodity rally, we still can't shake off a niggling feeling that market volatility, a stock market correction and general risk aversion is around the corner, which could place the brakes on the rally in risk ccies and correspondingly support the USD. JH
IGM Credit, IGM FX and Rates
By Tim Cheung 03 Aug 2020
Xinhua News Agency reported the Politburo held a meeting on the economy on 30 July (Thursday). The CCP also held a meeting with non-CCP political parties and non-political representatives. President Xi chaired both meetings. Compared to the meeting held on 17 April, we note some changes in wording were made to the remarks on monetary and fiscal policies in the 30 July meeting. 30 July meeting (as per Xinhua News Agency): - "While requiring full implementation of macro policies, the meeting called for pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results, according to the meeting". 17 April Meeting (as per Xinhua News Agency): - "Monetary policies should be more flexible and balanced and instruments such as reserve requirement ratio cuts, interest rate reductions and reloans should be fully leveraged to ensure reasonable and sufficient liquidity and a lower interest rate in the loan market, the meeting said, stressing the need to channel capital into the real economy, especially medium-sized, small and micro enterprises".
Topics Industry News