Sell EURPLN
(Peter Rosenstreich, head of market strategy)
As we expected, the start of 2017 has been filled with noise - punctuated by explosive comments from US President Trump's Twitter account. However, the European political landscape and the failure of Greek debt talks have provided plenty of new headline risks. Yet while western nations drive market volatility, the outlook for EM nations quietly improves. The primary reason is that despite heavy anti-globalization rhetoric global trade has improved as developed market's domestic demand has increased. This had led to a general strengthening in economic conditions. Secondly, in spite of a checkered history, EM nations are staying out of the spotlight. As a result, EM assets have delved solid YTD returns with historically low volatility, further encouraging inflows. We continue to see further currency appreciation in select EM currencies.
Yet in the first 30 days we can see that Trump's protectionist threats could materialize into real trade stoppers, especially considering the naming of Navarro and Ross to close advisory positions. Although the real policy initiatives will be hidden within plenty of bluster and grandstanding. Therefore we like EM currencies with limited correlation to Trump's erratic, uncertain behavior. In this context, in our view, PLN is poised for further appreciation against the EUR. Growth in Poland has been under steady pressure in recent years but now looks to be stabilizing around annual 3.0% GDP (2016 read surprised to the upside at 2.8%). January PMIs printed on the strong side, suggesting a solid momentum to the start of the year. Minutes of the January MPC meeting where the committee held policy rates at 1.50% indicated a shift from neutral to hawkish. Consumption remained subdued with slight acceleration but construction spending remains supportive. The latest pickup in activity supports the council's upbeat growth outlook while inflation has rebounded nicely. It is likely that the NBP will take it guidance from the ECB and postpone rate hikes till 2018, yet steady economic improvement in Poland and Europe should pull this date in. In Europe, fears of a IMF-EU standoff and delay of rescue funds, has Greek yield curve inverted with the 2-yr yield reaching 10%. In addition, contentions elections in Netherland, German and France will keep the euro weak.
Don't be fooled by strong Chinese trade data
(Arnaud Masset, market analyst)
January’s trade data from China printed much higher than expected with exports in yuan term jumping 15.9%y/y versus 5.2% expected, while imports surged 25%y/y compared to 15.2% median forecast. At first glance, it is tempting to conclude that the Chinese are back on track with the economic machine running at full speed. First of all, the weaker yuan had a massive effect on the trade valuation as in dollar term imports rose “only” by 16.7% (10% median forecast) and exports increased 7.9% compared to 3.2% expected and -6.2% in December. Secondly, the Chinese New Year always clouds economic data in January and February, making it difficult for investors to draw meaningful conclusions on the development of the world’s second largest economy.
We therefore remain cautious not to over interpret these preliminary figures from China, with the exception of the evolution of the foreign exchange reserve - which fell below the USD 3 trillion threshold in January, for the first time since early 2011.
All in all, a weaker yuan should continue to support China’s manufacturing industry that finally started to stabilise throughout 2016. Exports will therefore continue to recover should China’s relationship with the US remain friendly. USD/CNH continued to move toward 6.90 as it reached 6.87 this morning amid the strong dollar rally that has rattled FX market over the last few days.
Trump rally is not over
(Yann Quelenn, market analyst)
Yesterday was one of those days when stocks broke their all-time highs. The S&P 500 ended above 2300 points for the first time in history after Donald Trump revealed that he will make a corporate tax announcement within the next two to three weeks.
Equity markets revelled in the news and major indices recorded colossal gains. The Trump rally is not over and the new US president has once again managed to fuel market optimism.
Currency-wise, the greenback is still strong and the promised deregulation by the Trump administration is sending the dollar higher. On top of that, the Fed is expected to raise rates, which would boost dollar demand as other major countries are not expected to raise rates.
As a result of yesterday’s comment, gold took a hit and has lost almost 1% in the last 24 hours. We nonetheless believe that political and economic uncertainties are high in the medium-tern and we would take the opportunity to reload bullish positions.