EM Sovereign Rating Model For Q3 2020

The major ratings agencies continue to downgrade sovereign ratings across both EM and DM. Our own sovereign ratings model suggests that there is still more pain to come.

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Dollar Comes Under Pressure Again

  • US-China tensions are heating up again; the dollar is under pressure again
  • Talks on the next stimulus package may have made some limited progress; stalled talks have led Trump and some of his advisors to consider the use of executive decrees
  • US Treasury said it expects to issue $947 bln in debt in Q3; there is not much in the way of US data
  • CFTC data show speculative investors increased their short positions; Turkey reported July CPI; dislocations in Turkey’s money markets continue to rise
  • Japan July Tokyo CPI came in higher than expected; RBA kept policy unchanged, as expected

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Dollar Steadies but Further Losses Expected

  • The dollar is stabilizing after broad-based losses last week; ahead of jobs data Friday, we will get other important clues to the health of the US economy
  • Democrats and republicans still seem to be far apart in the stimulus bill negotiations; late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative
  • The UK government is reportedly considering re-instating some form of lockdowns in London should infection rates worsen; eurozone reported firmer final manufacturing PMIs
  • Japan final Q2 GDP remained steady at -2.2% SAAR vs. -2.8% expected; Caixin July China manufacturing PMI came in stronger than expected

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Drivers for the Week Ahead

  • The added jobless benefits expired Friday; the Fed made it clear that more fiscal stimulus is needed
  • Late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative; July jobs data Friday will be the data highlight of the week; Canada has a busy data week
  • BOE meets Thursday and no change in policy is expected; sterling tends to weaken on BOE decision days; eurozone reports final PMI readings this week
  • Japan has a busy data week; RBA meets Tuesday and no change in policy is expected

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EM Preview for the Week Ahead

EM currencies took advantage of broad dollar weakness against the majors last week, with most gaining against the greenback. Yet the week ended on a bit of a risk-off note as concerns intensified about the resurgent virus and the impact on the still-weak global economy. This sentiment may carry over into this week as markets await final July global PMI readings earlier in the week and key US jobs data Friday. Continue reading “EM Preview for the Week Ahead”

Dollar Soft as Unemployment Benefits Set to Expire

  • Markets are balancing the negative virus news stream with strong earnings reports; the dollar continues to make new lows
  • The extra $600 per week of unemployment benefits is likely to expire today; there are several US data readings out today; Colombia is expected to cut rates 25 bp to 2.25%
  • Eurozone preliminary Q2 GDP contracted -12.1% q/q and -15.0% y/y; July eurozone CPI came in higher than expected
  • Japan reported mixed data; signs of official concern with the strong yen are growing; China reported official July PMI readings; Korea reported strong June IP

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Dollar Steadies as Market Sentiment Sours

  • Market sentiment has soured today; the dollar has steadied but the outlook remains one of weakness
  • The Fed delivered a dovish hold with no surprises; extension of the Fed’s USD liquidity lines is a small positive for EM
  • We get the first look at US Q2 GDP; weekly jobless claims will also be reported
  • German data today has been mixed; eurozone July economic confidence index improved to 82.3 vs. 81.4 expected
  • Japan officials are planning to tighten restriction to help limit the current spike in infections; Japan reported strong June retail sales; the strong yen is raising official concerns

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Dollar Weak Ahead of Likely Dovish Hold from the Fed

  • The FOMC decision today is likely to deliver a very dovish tone; the dollar tends to weaken on FOMC decision days
  • Tensions about the latest US stimulus bill are rising; core bond yields have been remarkably stable over the last several months
  • UK unemployment will spike this fall if the government does not extend its wage program; Turkish central bank released its quarterly inflation report
  • Fitch moved the outlook on Japan’s A rating from stable to negative; Australia reported Q2 CPI; Hong Kong Q2 GDP came in weak Continue reading “Dollar Weak Ahead of Likely Dovish Hold from the Fed”