French Elections: Markets wait for impact of first round
(by Yann Quelenn)
There are only three weeks remaining until the first round of the French Elections. We know that whatever may happen in those last few weeks, declarations from candidates may still have an impact on the markets. This is why Mélenchon and Macron are refusing a debate. Francois Fillon has not renounced, despite being considered out of the race in February, and we may see him increasing again in polls. His chance of a final victory is still alive.
Regarding Emmanuel Macron, many socialists are now supporting him. What should we believe from that? We believe that their endorsement is less in a desire to counter the National Front, but rather to participate in the likely new presidential majority.
The markets are still betting on a Macron victory but we assume his inexperience is going to be tough to overcome against his major competitors. The markets seem calm and the first round is going to provide us with a decent gauge.
RBA to stay on hold and reiterate dovish stance
(by Arnaud Masset)
The Reserve Bank of Australia is widely expected to hold the Cash Rate Target unchanged at a record 1.50% tomorrow morning at its monthly meeting. At its previous meeting, the Central Bank did not miss the opportunity to emphasise that the pick-up in inflation was mostly due to improving commodity prices. It also said that underlying inflation is expected to rise at a much slower pace during 2017.
Tomorrow's statement will mostly be a cut-and-paste as Governor Lowe is determined to maintain a dovish stance to avoid any appreciation of the Australian Dollar, which would undermine the ongoing economic adjustment from the post-mining investment boom.
AUD/USD has continued to trade at the top of its yearly range at around 0.76-0.77. We believe that the downside adjustment in iron ore prices (futures for delivery at Qingdao port have fallen -15% since mid-February as port inventories reach extreme levels) is one factor in shifting the risk to the downside in AUD/USD. This comes together with rising uncertainties about the global demand outlook amid President Trump’s inability to pass reforms.
However, given the uncertainty generated by the Trump situation, long USD is not our favourite play. Therefore, we prefer to play a short AUD position against its closest neighbour, the New Zealand Dollar, as we believe the NZD has room for further appreciation.