Trading news

EMs still attractive

Despite the growing idiosyncratic risk that EM demand is unlikely to taper in the near term, global liquidity remains a primary driver of asset prices, above fundamentals. Although there are plenty of distractions such as the US election and EU / UK relations, until there is an actual structural shift, EM will continue to be in demand. Headlines have pointed to higher global yields potentially leading to increased volatility premia, but we suspect that the bond sell-off should moderate allowing higher yielding EMs to improve. EM bond funds saw good inflows last month despite negative noise. Should we be incorrect and global bonds see further liquidation watch for commodity linked currencies and EMs with higher current account deficits to be sold first (Near mirror image of the 2013 taper tantrum).

 

BoJ unlikely to slow purchases, sell JPY

 

We are not expecting much at this week’s BOJ monetary policy meeting. While economic data further slow the BOJ is likely to hold off any action until after the US election and fed December rate hike. That said the tone could suggest a shift from QE to interest rate targeting given the rate of balance sheet expansion. This would be meaningful not just for japan but for global central banks. Yields are rallying partly due investor limited expectations for addition central bank stimulus. Should the most progressive central bank in terms of policy mix "throw in the towel", it would be a clear signal that the days of unlimited liquidity are over. With bond yields higher, pressure is mounting on the Japanese yield curve. BoJ’s Kuroda, has confirmed that the central bank was actively buying in September. These comments and mixed economic data suggest that the BoJ is unlikely to taper asset purchase. Further extension of the bond buying program should help weaken JPY already under pressure as US rates shift upwards.

 

Sell GBP on rallies

 

The sterling has gained some lost ground on the back of the higher Q3 GDP print. The stronger-than-expected growth data currently indicates that Brexit has not doomed the UK economy like many had predicted. The solid read would also suggest that the BoE will not cut interest rates at the next meeting. However, GBP is not trading on fundamentals but rather on speculation of potential Brexit scenarios. The more fragmented and chaotic the political process, the more negative the sentiment grows around the GBP. We are still so early in the process that there seems to be a critical lack of framework indicating that the run-up to sending Article 50 to Brussels is going to get messy and temporary reprieve is likely to be met with disorderly rhetoric. 

 

We would be less likely to manifest our Brexit strategy through EURGBP than GBPUSD were the USD story clearer. EUR faces Belgium CETA backlash, Spanish elections, Deutsche Bank fears, ECB exhaustion just to name a few. Despite the US election risk the US looks like an easier play.

Monday, 31 Oct, 2016 / 2:55

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