Obamacare repeal bill: Defeat or Delay?
(Peter Rosenstreich, head of market strategy)
Judging from the thin, directionless flows in Asia, investors will have to wait for the outcome of today’s vote on the Obamacare repeal bill for the market's next move. So far, the market has hyped this event as being a test of US President Trump's policy agenda, suggesting that a defeated healthcare bill would translate into barriers for the much-awaited tax reform policy and broader pro-growth agenda. As suggested in yesterday's report, we concur that short-term volatility will be driven by the result of this afternoon’s vote. With the Republican opposition needing less than 22 members to vote against the measure (reports suggest that 24 members are prepared to obstruct), we believe that the bill will be rejected (if the bill reaches the floor and is not delayed).
Interestingly, Republican conservatives are already shifting the blame away from President Trump to Speaker of the House, Paul Ryan. However, regardless of the outcome, Fed monetary policy will provide investors with a clear directional view. The weaker dollar has created looser conditions, while political uncertainty has forced investors to fade expectations due to the steeper Fed policy path (June hike is now 50/50). Amid falls in real yields and signs that the Fed will be willing to tolerate higher inflation to ensure growth is stable, risky asset should continue to outperform. Today, Fed Chair Yellen will provide additional insight into monetary policy strategy. We expect that she will reaffirm the central bank’s slow and steady approach to tightening, decelerating the economy without spooking financial conditions. Given this outlook, we maintain our stance that further risk accumulations will favour EM currencies (ZAR, ILS, PLN and INR long continue to build).
SNB releases annual report
(Yann Quelenn, market analyst)
In the latest annual report from the SNB, we have learned that the Swiss central bank bought around CHF67 billion in foreign currencies in order to defend the franc. Comparatively, this is lower than in 2015 when the floor was removed.
The SNB still sees the franc as “significantly overvalued” and so the negative interest rate policy is more relevant than ever. However, for now, the central bank is sticking to its wait-and-see approach.
Europe's political uncertainties are weighing heavily on the EURCHF and we believe that bearish pressure shows no signs of easing. In terms of Swiss data, inflation has never been so high at 0.6% y/y and the unemployment rate remains moderate at 3.6%. Exports are a little more concerning with two consecutive declines in January and February (respectively -4% and -2.2%). In the short and medium-term, the Swiss Franc should remain below 1.0800 and the SNB is likely to intervene to avoid extreme strengthening. Finally, despite massive QEs, we believe that the ECB is likely to soon enter a tightening cycle – to reduce monetary policy divergence with the US - which in turn will definitely benefit the Swiss economy.
RBNZ is willing to tolerate higher inflation for a weaker Kiwi
(Arnaud Masset, market analyst)
As widely expected, the Reserve Bank of New Zealand has kept its Official Cash Rate target unchanged at a record low of 1.75. Also, Graeme Wheeler did not change his view on the overvaluation of the Kiwi, instead repeating the need for a weaker Kiwi “to achieve more balanced growth”. He also allayed fears concerning rising inflationary pressure, arguing that the spike was temporary, stemming from a temporary rise in commodity prices.
Overall, the tone of the statement suggests that the RBNZ is ready to tolerate higher inflation in order to allow for a weaker Kiwi. This may be a good decision especially as core inflation has picked up at a slower pace than headline inflation. However, we are having a hard time believing that the market will collaborate. Indeed, the Kiwi has been one of the worst performing currencies among the commodity complex (+1.8% against the USD), especially against the Australian dollar (+6% versus the USD). We think that the Kiwi has room for further appreciation, especially against the Aussie. AUD/NZK has already fallen 1.6% since mid-March and is now heading towards the next key support area at between 1.08-07(psychological level and Fibo 38.2% on December-March rally).