Currency markets' reaction to US military strike
(by Peter Rosenstreich)
Markets are slightly softer following news that the US launched a "targeted military strike” of 20 Tomahawk missiles against Syria. The move was cited as a response to a believed chemical weapons attack by the Assad regime. The military actions trigged the likely reaction in financial markets with a quick migration into safe-haven assets (Japanese Yen and Gold) out of stocks.
Yet despite significant potential geopolitical implications, the reaction was limited with the Ruble and Israeli Shekel taking the brunt of Emerging Markets FX selling (with the meeting between President Trump and President Xi dominating news cycles).
We anticipate that the risk-averse environment will quickly fade as the markets focus a return to fundamentals. This afternoon, US payroll reports will be key to markets' directions. The strength of the US economy will further influence the Fed policy and force markets to re-price their tightening strategy (with implications for the USD positioning).
With ADP's unexpectedly strong report at 263k, NFP is expected to increase by 180k and there will be a higher wage growth of about 2.7% that will drive the USD higher and risk aversion will fade. Trade in USDJPY remains the best way to capture the benefits from the strong US payroll report.
There is an active debate on whether the Fed should use a reduction of balance sheet or interest rate hikes as the primary tool for tightening. Our view is that the Fed will increasingly rely on balance sheet management over interest rate hikes. We expect the Fed will stop reinvesting capital early 2018 (see 6th April Daily Market Report), which will have a gradual impact on long-term treasury yields and a lesser effect on USD. This should allow EM higher yields to hold ground and low yielders to weaken against the USD.
Elsewhere, the much anticipated removal of the EURCZK floor sent the pair down to 26.60 with further weakness expected. The Reserve Bank of India held its benchmarked repro rate at 6.25% while raising the inflation outlook for 2017-2018 .25bp to 4.75%.
The RBI was little concerned about the pace of Indian Rupee appreciation and we suspect that this currency will strengthen further. In addition, by exhibiting no reaction to escalations of tension in the Middle East, the currency remains resilient to uncertain geopolitical events.
Switzerland FX reserves hit a fresh record high
(by Arnaud Masset)
The Swiss National Bank continued to defend tooth and nail the Swiss Franc against further appreciation, latest data has showed. After surging CHF 24.4bn in February, foreign currency reserves climbed another 14.9bn to reach CHF 683.2bn.
Despite the absence of clear communication, the SNB seems very keen on defending the implied floor of 1.07 and the least we can say is that the institution had a hasty start into the year.
The uncertainty generated by the upcoming French election has been a thorn in the side of the institution as it has had to increase massively its intervention since the beginning of the year (+37.9bn). And unfortunately for the SNB, there is little chance that it will get any relief in the coming month.
Against the global political backdrop, we believe that the central bank will soon start to loosen its grip on EUR/CHF and tolerate a stronger Swiss Franc. In addition, deflationary pressures have decreased substantially recently with the headline inflation measure hitting 0.6% y/y in March.
The risk remains heavily concentrated on the downside for EUR against CHF and there is nothing on the horizon that bodes very well. EUR/CHF is trading flat at around 1.0695 this morning
French Elections: Worst contraction for French industry since September
(by Yann Quelenn)
A few weeks ahead of the first round of the French elections and there is some disappointing data on the French industrial side. February's industrial production declined by -1.6% m/m, well below the market’s consensus at -0.3%. On an annualized basis, the decline is around -0.7%. Manufacturing production also declined strongly in February to -0.6% y/y. This is the worst contraction for French industry since September.
The end of the Hollande mandate is rather difficult and the new President will definitely have a hard time pushing the French economy. This very weak data illustrates why there has been a push towards more sovereignty over the last few years and the rise of the nationalism.
Regarding the election, the odds that Macron will win have been decreasing since the end of March and as we wrote earlier this week, Jean-Luc Mélenchon's likelihood to win the elections, even though still weak, are improving strongly. The first round results already promise to be surprising.
Amid all of this, the EURUSD pair should soon be back below 1.0600.