Investor capital flees emerging markets en masse

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  • Brazil’s BCB intervenes in currency markets to prop up Real
  • UK Q2 GDP revised higher to 0.7% from previously estimated 0.6%
  • CDN CPI falls short of expectations; Loonie remains weak against USD

An interesting day of trading had investors more willing to add risk to their portfolios, with not even a three-plus hour halt of the NASDAQ for technical issues able to slow down investor risk appetite. The S&P ramped higher throughout the North American session, adding 0.86% by the closing bell, while the NASDAQ had its best day in 6 weeks (despite being closed for a good portion of the day), up by 0.99% after the dust settled. The DXY remained relatively flat pivoting around 81.50, with the 10-year treasury finding some stable ground with its yield easing sub-2.9%. The Loonie struggled for most of the day, with traders looking to shed exposure to the commodity-linked currency after a negative retail sales print piled on pressure to the “taper-on” sentiment experienced from the FOMC minutes earlier in the week.

The overnight session began with the Nikkei following on the heels of Wall Street, with the Nikkei catching up to yen weakness and adding 2.21% heading into the weekend. The yen was well offered throughout the majority of the overnight session, with USDJPY working to establish itself north of the 99 handle, and broad-based USD strength lifting offers in the DXY.

In an effort to grapple with the recent turmoil in emerging markets, Brazil’s BCB is the latest central bank to step into the ring, releasing a statement overnight that it would be injecting $60bn USD into the market by year-end. The move is aimed at shoring up the real, which has been roiled lately as investor capital flees emerging markets en mass. The real strengthened on the release of the statement, rising by 1.62% so far this morning, with the USDBRL dropping south of 2.4. The follow through to the change in policy will be key, as investors gauge whether the central bank has the required FX reserves and the persistence to stem the overall weakening trend from early this year, and not flip-flop on policy like the Reserve Bank of India earlier this week.

A data check of Europe reveals the major equity indices are firmly situated in the green as we head into the North American cross, with the FTSE leading the way with a 0.47% increase at the time of writing. Encouraging news from the UK came in the way of a revision to Q2 GDP, with the second estimate increasing to 0.7% from the previous reading of 0.6%; the biggest contributor to the rise of second quarter economic growth was net trade, a positive development for an economy trying to shift away from its heavy reliance on consumer demand. The pound initially gained on the upward revision to the better than expected print, rising above 1.5600 against the USD, but that move has since been retraced on broad USD strength and Cable has slumped into the mid-1.55s.

As we get set for the North American open, inflation data for Canada during the month of July hit the wires earlier this morning. While the reading on the level of consumer prices did edge up slightly, it missed expectations coming with a monthly increase of only 0.1%. The soft inflation print is consistent with the incoming data that has hit the wires lately, with an absence of aggregate demand weighing on the CPI figures as businesses show no real urgency in hiking prices. The y/o/y headline reading came in with a 1.3% increase, up slightly from the June reading, but still short of the 1.4% increase that had been expected. The Loonie had been under pressure for the entire overnight session, but was little changed after the release as markets digested the numbers as not being as bad as they could have been. USDCAD is currently pivoting in the mid-1.05s, with daily momentum studies remaining positive and the technical target for longs at the July 5th high of 1.0608. Volatility in the pair is also increasing, with option pricing showing implied vol for USDCAD has edged above realized vol for the first time since mid-July, indicating options are getting more expensive as traders clamor to establish strategies to protect against a rising USD (risk reversals have also moved higher suggesting increased demand for call options.) All that said, the Bollinger Bands for the pair are starting to get stretched, and the Stochs are creeping into overbought territory, so there is potential that the miss in CPI wasn’t drastic enough to take USDCAD for another leg higher.

Turning our attention to the opening bell, US equity futures are pivoting close to unchanged, with relatively muted price action seeing a slight grind higher from the overnight lows. Hydrocarbons are finding some buying interest as well, with front month Brent making its way past $110/barrel while WTI changes hands north of $105/barrel. Not wanting to be left out of action in the commodity markets, Gold is also attracting some bids, with the front-month contract for the yellow metal up by 0.29% at $1,375/ounce.

Making our way into the weekend, New Home Sales for July in the US is due later this morning, set to be released at 10:00am EST. While expected to slip slightly from the annualized reading of 497k that was registered in June, the median analyst estimate of 490k is still elevated and continues to be at the upper end of the range we’ve seen since early 2010. Existing Home Sales released earlier this week came in at the strongest level since the middle of 2010, so there is potential we see the same pattern of home buyers trying to take advantage of mortgage rates before they move higher.

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About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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