LATAM FX: Goldman Sachs on LatAm FX: COP May Have Most Room To Run
- In a strong week for the Dollar, LatAm FX was among the hardest hit, given the sensitivities to rising US yields, as well as to volatility in both risk assets and commodity prices.
- Still, despite this week’s wobble, LatAm currencies remain among the clear outperformers in FX markets year-to-date, driven by both the flight of FX investors to the high carry and commodity exposure, as well as to a compression in domestic risk premia.
- Across a wide range of measures within a GS comparison framework, COP and CLP now scan as featuring the most ‘room to run’ further in LatAm FX; of the two, GS prefer COP, in part because of the potential for sustained policy rate hikes in Colombia to keep FX carry elevated.
- BRL features the region’s highest FX carry, moderate fixed income positioning and broad-based commodity exposure, which can generate further tactical USD/BRL downside, but eroding risk-reward after a strong run, and cooling domestic growth, leave GS cautious over the medium term.
- MXN features relatively little domestic risk premium compared with its LatAm FX peers; we think the way forward for MXN will depend as much on global as local factors.
- LatAm risk premia can compress further in 2022Q2, particularly if the global environment is supportive, but last week’s price action is a reminder of risks: while LatAm FX has been an unusual safe haven YTD, LatAm currencies could begin to look considerably less-safe if investors begin to re-focus on domestic growth, more than on carry or commodities, with LatAm rates moving higher up in the local asset rankings.
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US TSYS: Late Roundup, Headline Risk Sensitivity
Late morning rebuttal of Russia Pres Putin comment of "positive shifts" in Ukraine talks by Ukraine foreign minister Dmytro Kuleba on Bbg reversed the pre-NY open risk-on moves.
- Kuleba said there was "zero progress" in peace talks, and did not address Ukraine Pres Zelensky comment "Ukraine has reached a strategic turning point in war". Meanwhile , Kuleba asked for loopholes in sanctions against Russia to be closed along with ports currently open to Russian vessels. Kuleba reiterated Ukraine's "neutrality must come with security guarantees" while also asking for military supply including military jets offered by Poland earlier in the week.
- Tsy bonds back near early overnight high: USM2 +26 at 155-17 (30YY 2.3418% -0.0252) before settling back inside the session rtange. Yield curves bull flattened as 5s30s dipped below 40.0 briefly, marked 40.925 -3.222 after the close.
- Cross asset: SPX eminis -1.21% at 4196.75 (-51.5); West Texas Crude (WTI) +3.10% at 109.19 (+2.92); Gold -0.63% at 1984.47 (-12.52).
- Markets remain on edge -- wary of headline risk over the weekend. Look ahead: slow start to next week, no significant data Monday, Feb PPI on Tuesday MoM (1.0% prior, 0.9% est); YoY (9.7%, 10.0%).
USDCAD TECHS: Approaching The 50-Day EMA
- RES 4: 1.3024 38.2% retracement of the Mar ‘20 - Jan ‘21 bear cycle
- RES 3: 1.2964 High Dec 20 and a key resistance
- RES 2: 1.2924 High Dec 22
- RES 1: 1.2901 High Mar 8
- PRICE: 1.2725 @ 17:31 GMT Mar 11
- SUP 1: 1.2713 50-day EMA
- SUP 2: 1.2587 Low Mar 3
- SUP 3: 1.2552 76.4% retracement of the Jan 19 - Feb 24 rally
- SUP 4: 1.2499 Low Jan 21
USDCAD is lower following Friday’s strong employment report. The pair has traded through the 20-day EMA highlighting an extension of the pullback from Tuesday’s 1.2901 high. The focus is on the 50-day EMA, at 1.2713, and a key support. A clear break of this average would signal scope for a deeper retracement of the recent Mar 3 - 8 rally. On the upside, a break of 1.2901 is required to reinstate the recent bullish focus.
US TSYS: Eurodollar/Treasury Option Roundup
Friday FI derivatives trade saw carry-over interest in buying upside calls, and modest positioning in long puts. Theme gaining momentum -- despite underlying futures pricing in six to seven 25bp hikes by year end -- is that increased market uncertainty due to Russia's war in Ukraine is likely to forestall more hikes down the road (after the Fed hikes next week).
- Late examples in Treasury options: paper bought 25,000 TYJ 127.75 calls at 11 after the bell (ref: 125-31), followed by a Block buy of 32,000 TYJ 128 calls, at 10 ref 125-31.5 after paper bought 10,000 earlier in session at 9.
- Eurodollar option highlights included Block buy of +15,000 short Jul 98.25 calls, 8.0 vs. 97.58/0.20%, and +10,100 short May 97.62 combos.
- Large vol buyer picked up +20,000 (block) Dec 97.50/98.50 strangles, 46.5. In puts, paper +10,000 short Jun 97.50/97.75/98.00 put flys vs. Dec 97.12 puts.
