(10 MAY 2017)DAILY MARKET BRIEF 1:USD consolidates gains, EM currencies bounce back

After rallying aggressively since the beginning of the week, the greenback retreated against most of its peers as investors took a breather to assess the dollar’s outlook. The dollar index rallied as much as 1.16% since Monday morning and hit 99.68, thanks to a sharp debasement in the CHF (-1.80%), the JPY (-1.10%) and the EUR (-0.95%). Emerging markets were also badly hit with the TRY, PLN and ZAR falling 1.80%, 1.25% and 1.05% respectively. Despite this temporary setback for the greenback, we remain dollar positive as we believe the market is not done pricing in the upcoming rate hike by the Fed (implied probability for an upside move, extracted from the Fed funds futures, stands at 95.3%).

Emerging market currencies are on the front line, especially after the rise of downward pressure in commodity prices, which was mostly triggered by worries over China’s economic outlook. This morning, Asian EM have had a hard time keeping their heads above water, with the exception of the South Korean won that rose 0.30%.

Across the Pacific, USD/BRL continued to trade within its uptrend channel and is currently testing its 200dma that stands at around 3.2147. The publication of April’s inflation data will most likely leave investors unmoved. Headline inflation is expected to come in at 4.10% y/y, down from 4.57% in March, which would make it the lowest read since July… 2007, when it stood at 3.74%.

The BCB has been cutting the Selic aggressively since October last year and has even speeded up the process recently by cutting it 1% down to 11.25% in April. This is rather good news for the Brazilian economy as it gives a breath of fresh air on the credit side. Unfortunately, this move will make the Brazilian real less attractive for carry traders, which explains why the real has begun to reverse gains starting mid-March. USD/BRL closed Tuesday’s session at 3.1894 and is expected to open slightly lower this afternoon as the USD consolidates gains.

By Arnaud Masset