Forex Weekly

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José-Manuel Luna Foreign Exchange Advisor
Pier-Luigi Bonelli Foreign Exchange Advisor
Ugo Biancaniello Foreign Exchange Advisor


The pound soared by the most in two months and U.K. bonds slumped as Bank of England Governor Mark Carney said the Monetary Policy Committee may need to begin removing stimulus. The comments marked a shift in emphasis for the governor, who signalled last week that now was not yet the time to start the tightening process. The yield on two-year gilts touched the highest in more than a year as money markets adjusted to the change in language.

For several weeks, central banks have been making the case for a change in monetary policy in reaction to the stronger growth being recorded in their own country and, more generally, the improvement in global growth that has been fuelled by more vigorous world trade. The unemployment rate has declined to all-time lows in many countries, raising concerns this will lead to tensions over wages and salaries. In the wake of the Federal Reserve, several central banks now seem prepared therefore to embark on a normalisation of their monetary policy.

The German yield curve steepened through the short end after the ECB clarified the earlier statement by Mario Draghi. Peripheral debts outperformed, in particular Spanish and Portuguese debts. At 104bp, the SPGB-Bund spread is at its tightest since October 2016.

In Brazil, President Temer‘s administration promised reforms (labour and pension), but the recent corruption charges are at best a significant distraction to achieving these prior to the 2018 elections – and at worst will result in another round of political upheaval. It is difficult to envision political allies supporting Temer given such a low public approval rating that could stoke further voter backlash. Furthermore, with Lula leading in the polls for next year‘s election, there are risks that the reform process could be impaired for longer. BRL shall remain under pressure vs USD, Targeting 3.48 and 3.60 area.