Trade war bluff, USD weakerBy Peter Rosenstreich
So President Trump was bluffing: as we expected, the threat of a US-China trade war has deescalated. This is becoming a clear pattern of negotiation. Trump talks tough, and then backs down behind the scenes. Politically, this is brilliant – he can take his (ultimately) insignificant tariffs into November’s midterm elections as ‘proof’ that he has delivered on his 2016 campaign promises. This is a powerful message to his supporters that Trump will do what other politicians won’t do, i.e. stare down and stand up to China. In our view, the likelihood that Democrats this year will recapture the House or the Senate just got a lot less likely.
As geopolitical tensions eased, the LIBOR-OIS spread narrowed, US treasuries shifted into defensive trading and the USD was sold across the board. The greenback was especially weak against the commodity bloc, as China’s new RMB-dominated oil-futures-contract (a direct competitor to WTI and Brent) proved a massive success. With coming US-interest-rate hikes already priced in and additional hikes requiring significant acceleration in US growth, the USD upside look limited. Emerging markets currencies are improving on the lowering of trade risk, and the Euro could hardly look stronger. Core Euro area inflation should hold in March, pushing the European Central Bank closer to ending its dovish policy.
French economy robustBy Vincent-Frédéric Mivelaz
France is leading Euro-zone growth, with a final Q4 GDP annualised gain of 2.50% (Q quarter to quarter, +0.70%), a quarterly wage hike of 0.20% (consensus: 0.10%), unemployment at 9% (lowest since September 2009) and a February consumer price index rise of 1.20% (previous: 1.30%). The 2017 public deficit of 2.60% of GDP (2016: 3.40%), is back below the 3% mark imposed by the EU, a level not reached since 2007. France is improving its budget, helped strongly by global growth (e.g. VAT and taxes collected) and structural changes made in national spending.
We remain confident that France’s economy is on the way to recovery, just like the European Union, even though a budget deficit of 2.6% is high compared to Euro (19 EU members) and EU states (27 EU members) averages of 0.60% and 0.90%. Major reforms are still required for government spending of EUR 64.30 billion and a debt estimated at EUR 2’218 billion in 2017 (3.06% increase from 2016).
As EUR/USD continues to gain strength (+3.78% YTD) due to a weaker dollar and growing attraction of the Euro as a reserve currency, we expect the pair currently at 1.2470 to head to 1.25 in the short-term.