- Volatility continued to ease in the FX market as investors digest Trump win
- EUR/USD may climb to 1.13 as Fed hike is fully priced yet and given the ECB’s reluctance to increase stimulus
- Emerging market currencies may keep on descending as investors expected tougher trade relationship between the US and emerging economies
- President-elect Trump's astonishing victory in all probability will give UK pro-Brexitors an “ace up their sleeve”
- Current Brexit EU/UK negotiations have been relatively deadlocked with both parties’ leverages being relatively balanced.
- Yet, the scale could be tipped in the UK’s favor with the inclusion of outside trade agreements.
Volatility continued to ease in the FX market as investors digest Donald Trump's win. EUR/USD moved in a very narrow range in Tokyo - between 1.0876 and 1.0923. Given the fact that a December Fed interest rate hike is again fully priced in, the risk is on the upside in EUR/USD with the 1.13 level as the closest resistance. On the downside, the 1.0822-51 support area (previous low) will act as strong support. If broken, the road will be wide open towards 1.0458 (low from March 2015). However, given the ECB’s reluctance to increase stimulus, we see no reason for further EUR weakness in the short-term. This is however a different story in the medium to long-term as political risk will be the key factor as we move towards 2017. Upcoming risks events include the Italian constitutional referendum, the Spanish general election and Dutch national election in December this year, while next year the French presidential and parliamentary elections and German federal election will attract the market’s attention.
Emerging market currencies suffered a massive sell-off yesterday with investors expecting a tougher trade relationship between the US and emerging economies. The Brazilian real was in free-fall yesterday as it dropped almost 5% against the greenback with USD/BRL hitting 3.40 in session yesterday. The Colombian peso was off 3.75% to 3117.48, while the Chilean peso slid 1.08% to 656.80. In Asia, the South Korean won was off 1.24% as the BoK left its 7-day repo rate unchanged at 1.25%. Finally, the Indonesian rupiah was off 2.46% with USD/IDR stabilising 13,467 after hitting 13,872. Asian equity returns were mixed on Friday with the Japanese Nikkei and Topix edging up 0.18% and 0.14% respectively. In mainland China, the Shanghai and Shenzhen Composites were up 0.78% and 0.53% respectively. Offshore, the Hang Seng slid 1.44%, while the Taiex was off 2.12%. In Europe, equity futures were extending gains with the DAX up 0.36% and the Footsie rising 0.12%. In Switzerland the SMI was up 0.82%, while EUR/CHF was treading water at around 1.0750 as the SNB remained reluctant to step in to weaken the Swiss franc.
Yann Quelenn, market analyst: Market attention shifts towards Italy: "The situation in Europe is still very uncertain. The Brexit may need to be approved by the parliament and the overall economic slowdown pushing nations to vote against their current elites. The underlying crisis since 2008 still has deep consequences and massive monetary policy has not really helped. Austerity policies have prevailed. This is why we are closely looking to the next major event that will be held in Italy with the constitutional referendum next month. A referendum would give more power to current Italian leaders whose hands would be free to implement regulations from European institutions. The situation is going well in Italy and we do believe that austerity policies, as well as Trump’s election could trigger another vote against the Italian elites. From a data perspective, the Italian deficit forecast was recently revised higher at 2.3% while the Italian government initially agreed 1.8% to the European Institution. Deficit is growing at a fast pace. Currency-wise, the euro is likely to swing. Nonetheless, a referendum is not a sure bet. The Brexit still has a decent probability to be rejected by the UK parliament if the Supreme Court decides to oblige the parliament to vote for the acceptance of the referendum.” ---
Peter Rosenstreich, head of market strategy: “Watch for a US / UK trade deal: President-elect Trump's astonishing victory in all probability will give UK pro-Brexitors an “ace up their sleeve”. Current negotiations between the EU and the UK have been relatively deadlocked with both parties’ leverages being relatively balanced. That is because in reality both economies need each other equally (despite occasional hostile rhetoric). Yet, the scale could be tipped in the UK’s favor with the inclusion of outside trade agreements. Sitting US president Obama, prior to the EU-referendum, indicated that the UK would not get preferential treatment and would have to go to the back of the line. How things have changed. On the campaign trail Trump was extremely supportive of Brexit and quick to provide himself accolades for calling the historical outcome. In addition, consistently drawn parallels between his campaigns and the Brexit referendum indicate deep support for UK independence. Pro-Brexitor Nigel Farage was the highest ranking UK political figure to have shown his support for Trump. Trump’s comments that Britain would not be “at the back of the queue” indicate that he would be willing to fast track a UK trade deal. What a Trump presidency will look like is unknown, however we suspect that there is enough evidence to predict a quick trade deal will be on table for the UK which they can use to leverage in EU negotiations. Firstly, the US president has significant influence over trade and with a republican house and senate could move without resistance. Secondly, Trump bragged about his deal making prowess and will be eager to show the world. Thirdly, slightly anti-Europe comments on NATO and EU, suggest that the EU/US trade agreement will be challenging. Finally, Trump more than anything likes to be right. As the US president Trump is in a unique position to define the direction of Brexit. We remain constructive on GBP in the near term as we don’t anticipate political comments to indicate a “hard” Brexit.”