Brazil’s Government Caps Spending, UK Triggers Brexit

News and Events:

Brazilian government caps spending (by Arnaud Masset)

In spite of rising global uncertainty, emerging market currencies have been rather resilient over the last couple of weeks. However, one has to acknowledge that volatility also increased temporarily as investors preferred to remain cautious in the event that Donal Trump had to face another setback in implementing his programme. After completely erasing losses from last November and returning to around 3.05 in February, the Brazilian real has been trading in a volatile range since then, moving between 3.06 and 3.20 as investors await further clarity on the US outlook to emerge.

It goes without saying that local developments in EM countries have been largely ignored recently – with the exception of the political turmoil in South Africa earlier this week – as market participants were too busy trying to anticipate Trump’s next move. A fresh batch of economic data from Brazil is due for release later today. January retail sales are expected to come in at -4.3%y/y (versus -4.9% in December) or +0.5%m/m (versus -2% in the previous month). The Brazilian economy is slowly gearing up as the central bank progressively eases its monetary policy. The Selic rate is currently at 12.25% but the market anticipates the benchmark rate to reach 9% by the end of the year as inflation is expected to return within the BCB’s target range of 4.5% +/-1.5%. All in all, looking at the hard data it seems as though Brazil is on the right track, however on the domestic side, the political situation is in complete upheaval and the uncertainty that stems from it should prevent the real from returning quickly towards its pre-recession levels. Moreover, the austerity measures planned by the government will further delay a speedy recovery. Nevertheless, it is a necessary evil to restore confidence and attract foreign investments. Short-term BRL gains cannot be ruled out as investors are still chasing returns and Brazil’s temporary stability is quite attractive.

UK: The exit process has finally begun (by Yann Quelenn)

Since yesterday’s triggering of Article 50, the Footsie 100 has risen and is now trading 16% higher than pre-Brexit levels.

While the Brexit vote last year triggered a sell-off, we believe that there will not be a hard Brexit. However, it is clear that negotiations will be tough with all members having to agree on the final deal, which means that the next two years will be a serious rollercoaster ride.

We believe that the pound will further appreciate this year. Losing 20% in the wake of the referendum vote, the weaker sterling has provided the UK with a strong exports boost. Strengthening of the pound is now very likely especially as Europe faces a veritable minefield with the upcoming French and German elections. Time to reload GBP.

Today’s Key Issues (time in GMT):

• Mar Economic Confidence, last 91,5 TRY / 07:00
• Mar KOF Leading Indicator, exp 105,8, last 107,2, rev 106,9 CHF / 07:00
• Mar P CPI MoM, exp 0,20%, last -0,40% EUR / 07:00
• Mar P CPI YoY, exp 2,60%, last 3,00% EUR / 07:00
• Mar P CPI EU Harmonised MoM, exp 1,50%, last -0,30% EUR / 07:00
• Mar P CPI EU Harmonised YoY, exp 2,70%, last 3,00% EUR / 07:00
• Feb Foreign Tourist Arrivals YoY, exp -13,40%, last -9,80% TRY / 08:00
• Bank of Finland Governor Liikanen Briefing on Monetary Policy EUR / 08:00
• Mar Economic Confidence, exp 108,3, last 108 EUR / 09:00
• Mar Business Climate Indicator, exp 0,87, last 0,82 EUR / 09:00
• Mar Industrial Confidence, exp 1,4, last 1,3 EUR / 09:00
• Mar Services Confidence, exp 14, last 13,8 EUR / 09:00
• Mar F Consumer Confidence, exp -5, last -5 EUR / 09:00
• ECB’s Nowotny Speaks at Austrian central bank presser EUR / 09:15
• Feb PPI MoM, exp 0,50%, last 0,40% ZAR / 09:30
• Feb PPI YoY, exp 5,60%, last 5,90% ZAR / 09:30
• ECB Executive Board member Praet speaks in Berlin EUR / 10:00
• Mar FGV Inflation IGPM MoM, exp 0,05%, last 0,08% BRL / 11:00
• Mar FGV Inflation IGPM YoY, exp 4,88%, last 5,38% BRL / 11:00
• Feb Electricity Consumption YoY, last -0,60% ZAR / 11:00
• Feb Electricity Production YoY, last 0,80% ZAR / 11:00
• Central Bank Q1 Inflation Report BRL / 11:00
• Dutch Central Bank to Publish Annual Report EUR / 11:00
• mars.24 Foreigners Net Bond Invest, last $10m TRY / 11:30
• mars.24 Foreigners Net Stock Invest, last $44m TRY / 11:30
• Jan Economic Activity MoM, exp -0,10%, last -0,26% BRL / 11:30
• Jan Economic Activity YoY, exp -0,20%, last -1,82% BRL / 11:30
• Feb South Africa Budget, last -38.7b ZAR / 12:00
• Jan Retail Sales YoY, exp -4,30%, last -4,90% BRL / 12:00
• Jan Retail Sales MoM, exp 0,50%, last -2,00% BRL / 12:00
• Jan Retail Sales Broad YoY, exp -5,90%, last -6,70% BRL / 12:00
• Jan Retail Sales Broad MoM, exp -0,90%, last -0,10% BRL / 12:00
• Mar P CPI MoM, exp 0,40%, last 0,60% EUR / 12:00
• Mar P CPI YoY, exp 1,80%, last 2,20% EUR / 12:00
• Mar P CPI EU Harmonized MoM, exp 0,50%, last 0,70% EUR / 12:00
• Mar P CPI EU Harmonized YoY, exp 1,90%, last 2,20% EUR / 12:00
• 4Q T GDP Annualized QoQ, exp 2,00%, last 1,90% USD / 12:30
• 4Q T Personal Consumption, exp 3,00%, last 3,00% USD / 12:30
• 4Q T GDP Price Index, exp 2,00%, last 2,00% USD / 12:30
• Feb Industrial Product Price MoM, exp 0,40%, last 0,40% CAD / 12:30
• 4Q T Core PCE QoQ, exp 1,20%, last 1,20% USD / 12:30
• Feb Raw Materials Price Index MoM, exp 0,90%, last 1,70% CAD / 12:30
• mars.25 Initial Jobless Claims, exp 247k, last 261k USD / 12:30
• mars.18 Continuing Claims, exp 2031k, last 1990k USD / 12:30
• mars.24 Gold and Forex Reserve, last 395.7b RUB / 13:00
• Finance Minister Padoan, Bank of Italy Governor at Event EUR / 13:00
• Fed’s Mester Speaks in Chicago on Payment System Improvement USD / 13:45
• mars.26 Bloomberg Consumer Comfort, last 51,3 USD / 13:45
• Dallas Fed’s Kaplan Speaks in Washington USD / 15:00
• Fed’s Williams Speaks at Learning Community Event in New York USD / 15:15
• Feb Central Govt Budget Balance, exp -21.6b, last 19.0b BRL / 18:00
• Fed’s Dudley Speaks in Sarasota USD / 20:30
• Feb Building Permits MoM, last 0,80% NZD / 21:45

The Risk Today:

EUR/USD is getting lower. The pair has failed to hold above former resistance given at 1.0874 (08/12/2017 high). Hourly support is given at 1.0719 (21/03/2017 low). Stronger support can be found at 1.0493 (22/02/2017 low). The short-term technical structure indicates further weakness.. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD has exited short-term uptrend channel. Hourly resistance is located at 1.2615 (27/03/2017 high). Hourly support is given at 1.2324 (03/17/2017 low). Expected to show renewed strengthening towards resistance at 1.2771 (05/10/2016 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY‘s bearish pressures are fading. Hourly resistance can be located at 113.57 (16/03/2017 high) while support is given at 110.11 (27/03/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is strengthening. Hourly support is given at 0.9814 (27/03/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show further consolidating below parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.