Property of BBVA 01-Jun-23

Global FX Daily 01 June 2023

(09:08 CET)

EURUSD consolidates below 1.07 as inflation figures miss expectations

LatAm feels the pressure as risk sentiment and commodities shake
BRL shows momentum on both sides
MXN loses ground but outperforms LatAm FX high-Betas that await US debt unlock confirmation

US House passes the fiscal deal but fears about the global cycle persist
Risk-off prevailed in financial markets yesterday, with equities closing the European session in the red and bond
yields broadly falling as investors awaited the US House vote on the debt ceiling. Later in the day, US policy makers
passed debt-limit legislation in the lower house that will impose restraints on government spending through to the
2024 election. The bill will also have to be approved by the Senate, where endorsement is virtually certain and the
only question is timing. Senate Republican leader Mitch McConnell said yesterday that the measure could get a
vote as soon as today. The debt bill suspends the debt ceiling until January 2025, removing the threat of another
default crisis for the remainder of Joe Biden’s current presidential term. In exchange, the Democrats agreed to cap
federal spending until 2025 and that will have a negative impact on activity in 2024. The choices on how to adjust
government services are mostly left to Congress to negotiate in separate spending packages due before October,
the start of the next federal fiscal year.

Market sentiment improved overnight after the vote, with European equity futures rising alongside Asian shares.
Fed comments in favour of a pause in rate hikes and the upward surprise in the Chinese manufacturing PMI also
backed sentiment. Fed Governor Philip Jefferson said the central bank is inclined to keep interest rates steady in
June, echoing the comments by Philadelphia Fed President Patrick Harker, who said, “I think we can take a bit of a
skip for a meeting”. Nonetheless, FX majors have remained in ranges and the USD has even received some
support ahead of the European bell. EURUSD is trading at c.10680 while the macro publications failed to give
support to the EUR. Retail sales data out in Germany missed expectations but the previous reading was revised
higher, while the Dutch CPI for May exceeded expectations and rebounded from 6.2% YoY to 6.8%.

NEW YORK BRANCH

Chief Strategist Global & LatAm
Alejandro Cuadrado* William Snead* David Fritz*
alejandro.cuadrado@bbva.com william.snead@bbva.com david.fritz@bbva.com
+1 (212) 728 1762 +1 (212) 728 1698 +1 (212) 728 1648

MADRID
Chief Strategist
Roberto Cobo* Ángel Meneses* Silvia González*
roberto.cobo@bbva.com angel.menesesq@bbva.com silvia.gonzalez.mora@bbva.com
+34 91 537 39 59 +34 91 374 56 82 +34 628 08 37 06
(*) Author(s) of this report

This document is for institutional investors as defined under FINRA Rule 4512(c), is not independent of the firm’s trading
activities and not subject to all of the independence and disclosure standards applicable to BSI’s credit research group
PLEASE SEE IMPORTANT DISCLOSURES ON THE LAST PAGE OF THIS REPORT.
Property of BBVA 01-Jun-23

EURUSD consolidates below 1.07 as inflation figures miss expectations

Yesterday EURUSD edged south to the lowest since March at around c.1.0650, after May inflation figures in
France, Portugal and Germany fell more than expected. Nonetheless, as some ECB policy makers highlighted
yesterday, the central bank’s work is not done yet. Vice President Luis de Guindos said “I could not say that the
victory is there so far, I think that we are on the correct trajectory and we have to look very carefully at the
evolution of core inflation”. His sentiments were echoed by his colleague Madis Muller, who declared there will
probably be more than one additional 25bp hike, warning that inflation “unfortunately shows no signs of slowing
yet”. In the meantime, the ECB’s financial stability review was published, highlighting that financial markets will be
vulnerable to shocks as the central bank continues the fight against inflation, with real estate among the sectors at
risk. The property market was underlined by the ECB as house prices have cooled considerably over a relatively
short period of time. Today will also be a busy day of data releases in Europe, including eurozone manufacturing
and inflation figures. European Central Bank President Christine Lagarde will also speak at a conference on
Thursday. Short-term risks looks skewed to the downside ahead of the US non-farm payrolls tomorrow.

As risk sentiment and commodities shake, LatAm feels the pressure

Heavier LatAm positioning into early May has left regional currencies more sensitive to swings in market mood
than they were earlier this year. On Wednesday, a combination of stronger US job openings data and weak
economic data in China fuelled risk-off sentiment and a flight to quality, pushing the USD higher and UST yields
lower, while concerns about economic growth negatively impacted commodity prices and in turn put LatAm FX
under pressure. Currencies that tend to be more correlated to commodity prices (the BRL and COP)
underperformed, while the MXN is still enjoying the tailwind of an increasingly likely US debt ceiling solution.
Overall, LatAm’s losses are still very much contained, with the BRL now having built some distance to YtD highs,
but with most still close to multi-month and multi-year highs. The month of May also showed some differentiation,
with the COP and MXN outperforming and the CLP and BRL underperforming. Currently, external factors that
could have a negative impact on fundamentals are outweighing LatAm FX’s high carry, so continued volatility or
risk pressures could lead to some additional negative momentum before valuations can kick in.

The MXN loses ground but outperforms LatAm FX high-Betas that await US debt lifting confirmation
The MXN depreciated by close to 0.2% on Wednesday, but while it lost some ground it outperformed other LatAm
FX high-Beta peers. Compared to other liquid LatAm currencies, the MXN has less correlation to commodity
prices and economic activity in China, and is more exposed to economic activity in the US and in the long-term
benefits from near-shoring activity, which has been seen as one of the factors supporting the MXN’s good
performance. The US debt ceiling issue continues to overshadow the MXN’s performance, but relief has already
filtered through this week, and full confirmation of approval by both chambers of US Congress can solidify the
USDMXN 17.5-18.0 short-term range.

The COP loses steam, underperforms LatAm FX

After displaying a high level of resilience and closing the month (and YtD) as the best performer in LatAm FX, the
COP lost some steam on Wednesday and depreciated by close to 1.3%. The COP’s recent performance seemed to
defy the weakness in oil prices. Investors appear to be turning more complacent about the political prospects in
Colombia and, as of late, they have been favouring Colombian assets.

Weaker commodities and political noise weigh on the BRL, as it shows momentum on both sides
The BRL has seen increased pushback in the past couple of weeks. Lower commodities and heavier positioning
have weighed on the Brazilian currency, and yesterday a new political controversy added to the mix. A relatively
unknown political struggle regarding a necessary extension of Congress was brought to the fore on Wednesday,
causing President Lula to call an emergency meeting. After markets closed, Brazil’s lower house approved a

Global FX Daily / 01 June 2023 P.2

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Property of BBVA 01-Jun-23

provisional measure re-establishing Lula’s cabinet, a relief for the government as several ministries were put under
threat without the last-minute approval. Although rolling back the bevy of new ministries created by the
government wouldn’t have had a major impact on activity, it caused noise. And, as usual, FX was the first to react,
in this instance with additional losses which could bring some bids back. Notably, Lula had to make concessions in
order to obtain the support of Congress, including a reduction in the powers of Brazil’s Ministry of Environment.
The latter could be a fresh test for the administration and may not be the end of friction, as potential vetoes of
other government measures could provoke new confrontation with Congress. Beyond that, the general risk-off
sentiment and high-Beta nature of the BRL contributed to the real’s relatively poor performance. Since 15 May,
when the BRL pushed through the USDBRL 4.90 level, the currency has been trading on the softer side and seems
to be heading to the USDBRL 5.10 threshold.

Technical analysis
S2 S1 Spot R1 R2 Momentum* 1y % chg
EURUSD 1.0516 1.0635 1.0682 1.1083 1.1185 ▼▼ 0.3
EURGBP 0.8550 0.8583 0.8587 0.8979 0.9267 ▼▼ 0.6
USDJPY 133.59 135.00 139.73 140.73 142.46 ▼ 7.4
EURCHF 0.9500 0.9674 0.9728 1.0000 1.0179 ▲ -5.2
USDCAD 1.3224 1.3317 1.3570 1.3500 1.3665 ▼ 7.2
AUDUSD 0.6268 0.6400 0.6507 0.6793 0.7000 ▼ -9.3

USDMXN 17.0507 17.4207 17.6662 18.4011 19.2906 ▲ -10.3

USDBRL 4.5816 4.6913 5.0556 5.1014 5.3400 ▲▲ 5.0
USDCOP 4226.50 4333.04 4451.11 4885.19 5047.61 ▼ 17.1
USDCLP 763.13 771.29 809.53 840.40 880.02 ▲ -1.8
* Momentum reflects the pair's recent short-term trend and intensity
Source: BBVA FX Strategy and Bloomberg; Data as of 01 June 23 8:56 (CET)

Key upcoming data and event highlights for the next 24-hours:
US ISM Manufacturing (May) Survey: 47.0 Previous: 47.1. ADP Employment Change (May) Survey: 160.0K Previous:
296.0K. Fed's Harker Speaks on Economic Outlook
EMU EMU: PMI Manufacturing (May F) Survey: 44.6 Previous: 44.6. EMU: CPI Estimate (May) Survey: 6.3% YoY Previous:
7.0% YoY. EMU: Unemployment Rate (Apr) Survey: 6.5% Previous: 6.5%. France: PMI Manufacturing (May F) Survey:
46.1 Previous: 46.1. Germany: PMI Manufacturing (May F) Survey: 42.9 Previous: 42.9
UK Net Consumer Credit (Apr) Survey: GBP1.5Bn Previous: GBP1.6Bn. S&P Global/CIPS UK Manufacturing PMI (May F)
Survey: 46.9 Previous: 46.9
Sweden PMI Manufacturing (May) Survey: 0.0 Previous: 45.5. Riksbank report on financial stability
Switzerland PMI Manufacturing (May) Survey: 45.0 Previous: 45.3
Mexico Central Bank Monetary Policy Minutes
Brazil GDP (1Q) Survey: 2.7% YoY Previous: 1.9% YoY
Colombia Current Account Balance (1Q) Survey: USD-5055.0M Previous: USD-4986.8M
Peru CPI (May) Survey: 7.9% YoY Previous: 8.0% YoY
Source: BBVA FX Strategy

Global FX Daily / 01 June 2023 P.3

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Property of BBVA 01-Jun-23

Markets Strategy
Director of Global Markets Strategy
Ana Munera
ana.munera@bbva.com
+34 91 374 36 72

Chief Strategist
Alejandro Cuadrado
alejandro.cuadrado@bbva.com
+1 (212) 728 1762

G10 LatAm
Chief Strategist Chief Strategist
Roberto Cobo Alejandro Cuadrado
roberto.cobo@bbva.com alejandro.cuadrado@bbva.com
+34 91 537 39 59 +1 (212) 728 1762
Ángel Meneses William Snead
angel.menesesq@bbva.com william.snead@bbva.com
+34 91 374 56 82 +1 (212) 728 1698
Silvia González David Fritz
silvia.gonzalez.mora@bbva.com david.fritz@bbva.com
+34 628 08 37 06 +1 (212) 728 1648

Global FX Daily / 01 June 2023 P.4

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Property of BBVA 01-Jun-23

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Global FX Daily / 01 June 2023 P.5