The Treasury yield curve steepened after the Fed said it would double the pace at which it tapered bond purchases, projecting three 25bp interest rate hikes in 2022, another three in 2023, and two more in 2024. Stocks have wobbled in recent weeks as investors tried to price in the prospect of rate hikes while also assessing the risks from the spread of the Omicron variant. The market's early response to the Fed signals some relief stemming from policy clarity, a seriousness in addressing pricing, and optimism that the rebound from pandemic lows can withstand the shift away from ultra-loose monetary tightening. The Bank of England (BoE) unexpectedly raised interest rates for the first time since the pandemic struck, brushing aside the threat to the UK economy posed by record coronavirus cases to become the highest-profile central bank to confront rising inflation. Officials led by Governor Andrew Bailey voted 8-1 to raise borrowing costs by 15 basis points to 0,25%, an increase no other G7 central bank has achieved since the start of the crisis. The five-year Treasury rate that protects against inflation, or the difference between those yields and those of typical Treasury bonds, approached 2,8%. That suggests the Fed still faces the challenge of bringing inflation down toward its 2% target. Markets appear to be complacent about the idea that the Fed can achieve a soft landing—can engineer this soft and graceful landing without many rate hikes.
The US dollar (DXY) is trading lower than Wednesday's closing price, near 96.142, bringing the index's value to 96.142 points, after reaching yearly highs yesterday. The dollar weakened against its rivals Wednesday night following the US Federal Reserve's decision to accelerate its asset reduction. The US dollar index is consolidating its losses following the Bank of England's surprise interest rate hikes, while the European Central Bank announced a faster pace of its PPP program and held interest rates unchanged. We expect a trading range of 96.0-96.6 for the day.
The Colombian peso (COP) rose 0.1% on Wednesday, closing at 4,000,30 per dollar, experiencing increased intraday volatility, falling to 3,975 pesos per dollar, anticipating further gains following the expected Fed announcements later this month. The outlook for the Colombian peso is mixed, driven lower by a decline in the DXY index following the Fed's statement, in line with market expectations. However, it is under upward pressure from negative movements in oil prices and credit default swaps in Colombia, which could lead to further depreciations in the peso's price. In this context, we expect a daily trading range between 3,970 and 4,020 pesos per dollar.
The Mexican peso (MXN) is starting the day with a 0.31% appreciation, trading at 20.9473 Mexican pesos per dollar, after yesterday's 1.05% appreciation thanks to the weakening dollar due to improved market sentiment. The currency is responding to stronger oil prices, while a 25 bps rate hike in the monetary policy rate is expected at today's Banxico meeting. We anticipate a narrow daily trading range between 20.805 and 21.12.
The Chilean peso (CLP) opened the day depreciating 0.08%, trading at 851.25 Chilean pesos per dollar. As a result of increased uncertainty as the second round of the presidential elections approaches, this has maintained a higher risk sentiment in the region throughout the week. This is accompanied by a decline in the DXY index, trimming the previous day's gains following the FED announcements, and an advance in the copper futures price, trimming the week's losses. In this context, we expect a narrow daily trading range between 859.20 and 841.55.
The Peruvian sol (PEN) closed Wednesday with a marginal depreciation of 0.04%, trading at around 4.0534 Peruvian soles per dollar. The currency's performance comes amid a slowdown in economic activity in the country, along with a reduction in the unemployment rate. The currency remains pressured by idiosyncratic political risk factors. We forecast a narrow daily trading range between 3.995 and 4.087.
The Chinese yuan (CNH) opened trading lower, trading at 6.3763 yuan per dollar, with the USD/CNH rising 0.05%. This was accompanied by lower volatility, with the pair falling to its lowest level in six weeks after the Fed moved toward a somewhat more aggressive monetary policy, in line with market expectations. Local traders are speculating about a reduction in the prime lending rate. In this context, we expect a narrow daily trading range between 6.3810 and 6.3695.
The euro (EUR) opens the day with a 0.14% gain at a trading price of US$1.1301 per euro. The European currency begins the day paring gains after reaching 1.318, a two-day high. The euro is losing strength against some stability in the dollar during yesterday's close and remains stable ahead of the ECB's decisions. The European Central Bank's decisions will be very important in setting the currency's course; traders expect no changes in interest rates and are attentive to Lagarde's comments regarding the bond program. Before the ECB's statements come those of the BoE, which could also affect the euro through the EUR/GBP. On the other hand, according to data from the IHS Markit index, an indicator of overall economic health, business growth in Europe fell more than expected, from 55.4 to 53.4, weighed down mainly by the services PMI. Remember, the services sector is the most important in the bloc and has been held back by the advance of Omicron. In this context, we expect a narrow daily trading range between 1.135 and 1.127.
The pound sterling (GBP) appreciated 0.79%, reaching 1.3267 per dollar. The pair began the day consolidating a positive trend, driven primarily by optimism surrounding Brexit, which shows progress in the United Kingdom regarding the problems with Northern Ireland. However, the continued increase in infections across the country, along with high local inflation, could end up affecting the British pound's capitalized gains. In this context, we expect a narrow daily trading range between 1.342 and 1.332 per dollar.
The Japanese yen (JPY) opened the session lower, with USD/JPY rising 0.14% to trade around ¥114.18, maintaining a bullish tone as the yen weakened against the dollar following the FOMC meeting. Traders are keeping an eye on several economic events such as unemployment benefits, housing data, and European interest rate decisions from the Bank of England and the European Central Bank. In this context, we expect a narrow daily trading range between 114.55 and 113.85.
The Swiss franc (CHF) is opening the day with a 0.02% drop to 0.9246 francs per dollar. The European currency is starting the day with slight declines following the Fed's policy decisions on Wednesday. Meanwhile, investors are trading cautiously ahead of the ECB and BoE statements, which will provide important market signals. In this context, we expect a narrow daily trading range between 0.928 and 0.921.
The Canadian dollar (CAD) began the day with a 0.46% appreciation, equivalent to a quote of over 1.2775 Canadian dollars per American dollar. The currency's performance is explained by the weakening of the dollar's strength index as market sentiment improves following expectations that the Federal Reserve's monetary policy tightening should successfully combat inflation and allow for sustained economic growth. In this regard, oil prices are rising. Locally, the CPI reading was 4.7% year-over-year, representing high levels that the BoC should strive to control. We anticipate a narrow daily trading range between 1.271 and 1.283.
The Australian dollar (AUD) appreciated 0.65%, reaching 0.7215. The pair managed to start the day by consolidating a positive trend thanks to much better market sentiment and increased investor appetite. However, the Reserve Bank of Australia governor's recent statements regarding the rise in infections and the opposition to a rate hike at the start of 2022 could keep the currency's gains limited. In this context, we expect a narrow daily trading range between 0.725 and 0.717.
The New Zealand dollar (NZD) opens the day up 0.63%, trading at 0.6821. The pair managed to consolidate a positive trend at the start of the session despite the latest economic data showing that New Zealand's third-quarter GDP recently fell below expectations by -4,5% to -3,7%. For now, investors are waiting to see how the pandemic progresses, so caution could be seen in the markets, which could ultimately affect the currency. In this context, we expect a narrow daily trading range between 0.678 and 0.671.
We are convinced that every investor should diversify their investments across a variety of asset classes, regardless of market environment or trend, and work closely with their financial advisor to ensure their portfolio is adequately diversified and that their financial plan supports their long-term goals, time horizon, and risk tolerance. However, diversification does not guarantee profit or protect against loss. The preceding information, as well as the individual companies and/or securities mentioned, should not be construed as investment advice, a recommendation to buy or sell, or an indication of an intention to trade on behalf of any Acciones & Valores SA product. The securities mentioned may or may not be part of Acciones & Valores SA funds. For a complete list of Acciones & Valores SA portfolio holdings, please refer to the most recent annual, semi-annual, or quarterly report on our website. This document is for informational purposes only. Acciones y Valores is not responsible for the interpretation of such information, given that it does not cover all the aspects that an investor might consider necessary or desirable to analyze their decision to participate in a transaction, given that it is presented in an abbreviated form. For complete and absolute accuracy, investors must consult all documents provided through the website. Likewise, investors must conduct their own financial and legal analysis before making any investment decision. The values and figures contained herein are obtained from market sources presumed to be reliable, such as Bloomberg, Reuters, and the Issuers. The ratings contained in this report should not be considered investment recommendations or substitutes for ratings issued by certified credit agencies such as Moody's or Standard & Poor's. These ratings are solely quantitative; they do not include qualitative factors and depend on the financial information available in the market at the time of preparation. The opinions, estimates, and projections in this report reflect the author's current judgment as of the date of the report, and it is clarified that the content of the information contained herein is subject to change without notice. The authors' compensation is not associated with the results of the report or the recommendations made. The presentation and any preliminary documents regarding the products mentioned herein do not constitute a binding public offer; therefore, both the presentation and any other documents are subject to supplement or correct.
Héctor Wilson Tovar García Macroeconomic Analysis
Research Manager wtovar@accivalores.com
Laura Daniela Triana Pulido Equity Analyst daniela.triana@accivalores.com
Daniel Herrera Hernandez Fixed Income Analyst daniel.herrera@accivalores.com
Juan Pablo Bejarano Holding Sector Analyst juan.bejarano@accivalores.com
Andres Felipe Campos, Retail Sector Analyst andres.campos@accivalores.com
Daniel Felipe Pardo Energy Sector Analyst daniel.pardo@accivalores.com
Juan Felipe Herrera, Financial Sector Analyst juan.herrera@accivalores.com
Back to blog
