All eyes shall be on central bankers this month. The news that the ECB is buying up unlimited quantities of bonds has triggered a certain amount of optimism, nevertheless this announcement came with the catch that the troubled nations must apply for either a partial or a total bailout in order for the ECB to be able to purchase their debt.
So that obviously begs the question: when shall Spain request a bailout? Surprisingly, there has not been much speculation in this regard, since the argument that Spain is still waiting for clearer terms and conditions is a rational one, especially now that bailout packages are hampering access to the capital markets. So, Spain shall be the topic of much discussion in September.
As for the FED, we expect them to announce that interest rates shall remain low beyond 2014, as initially set, and continuing well into 2015, with no purchases of assets as many are expecting. The FED is expected to wait a little longer before making any comments with regard to the much discussed subject of the “Fiscal Cliff”, preferring to wait for Q3’s economic data, the job market numbers as well as the outcome of the upcoming Presidential elections.
Another factor that is expected to trigger higher levels of volatility is the packed political calendar, mainly in Europe, which is due to play out half way through this month. Not much progress is expected, although this shall probably give rise to a certain amount of market noise, which could be compounded by further downgrades with Spain’s sovereign debt rating. A series of meetings are due to be held, prior to the European summit in October, that of the EU leaders (October 18 – 19) being the most noteworthy.
So we can safely conclude that there are not many upside factors this month, coupled with the fact that volatility normally goes up in September.
US Treasury bonds are set to continue along a downward bias, with the 10-year rates dipping to around 1,7856%. Nevertheless, given the aforementioned factors as well as the fact that the FED is expected to act - although it is still unclear when - we would expect long positions to be taken up with US Treasury bonds which would lead to a greater degree of flattening along the curve.
As far as currencies are concerned, the EURUSD rate has somewhat surprisingly continued along an upward bias, which is providing enough elbow room to reach as far a 1,2748, where we should see profits being taken off the table. The EURUSD rate is expected to close at 1,2580 for September.
In Colombia, the USDCOP rate has undergone a series of corrections after the pronounced upswing in August. This recent decline, together with ongoing appetite for investing in Colombia, could well lead the local exchange rate down to around COP1,785. Nevertheless, upon reaching this support level, events on the external front are likely to push it back up to close for the month at COP1,800.
This research is provided for informational purposes only. It does not constitute or shall be considered as an offer to sell or purchase any financial instruments. Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text.