Stick with core driver over short-term Trump hype
(Peter Rosenstreich, head of market strategy)
Our core driver for macro asset pricing for the last five years has been that global central bank accommodating policy will support risk taking. Brexit, Trump, terrorism, for all their thunder can move investors off cheap capital. If the prospect of breaking up the world’s largest economic union in two days (UK triggering Article 50) elicits a panicked stampede of risk aversion, then what would be the reaction to the prospect of US political gridlock? We caution investors from getting stuck on transitional headlines and view nonstructural forced pullback (risk valuations are high) as an opportunity to reposition longs. Asian stock indices have reversed the US decline, indicating that traders have already shifted from the Trump story. Additional weakness in the US yields curve has helped support risk taking (US 10-year yields stabilised at 2.37%). USD has been weaker against most EM currencies especially RUB and MXN, as Chicago Fed President Evans provided a dovish tone (not surprising). He indicated that the failure of the repeal Obamacare bill increased uncertainty and should naturally lower the prospects of a Fed hike. This new cycle highlights the risks of chasing volatility versus sticking to the core driver. On the docket today are two known hawks, Kaplan and George both of whom will keep the hopes of a June hike alive. We remain bullish on risk despite evidence of overstretched USD selling and viewing the opportunity to harvest carry as a rationale to participate in higher yielders (limited macro risk). The lone exception would be our short trade EURCHF, which is expected to grind lower, placing the SNB in a very difficult situation.
Mexico regains some strength despite Trump
(Yann Quelenn, market analyst)
Markets are pricing in further difficulties for Trump to deliver his program. The never-ending story of Trump’s wall for the Mexican border is far from over, yet it seems very difficult to imagine how it will be financed, though we recall that his initial thoughts were that Mexico should pay for it themselves.
Economically, Mexico is closely scrutinising any and all developments from the Fed. This Thursday, Banxico will likely increase its overnight rate to 6.5% from 6.25%. The Mexican central bank has changed its meeting dates to closely follow FOMC meetings in order to make sure that Mexican monetary policy is not surprised by any Fed moves. One of Banxico’s main objectives is to keep a rate spread between itself and the US to avoid any capital outflow.
Currency-wise, the MXN, which has suffered from Trump’s election, has strengthened since mid-January. Other data, shows that Mexico has regained some colour in its cheeks, including trade deficit which narrowed in February from $736 million in January to $398 million and factory exports, which have also enjoyed a boost.
Furthermore, we firmly believe that Trump will face major challenges in attempting to rewrite the NAFTA (North American free-trade agreement), which has tied Canada, the US and Mexico for more than two decades. For this reason, we believe that there is further room for MXN and we target 16.00 before year-end.
ZAR slides as political uncertainty rises
(Arnaud Masset, market analyst)
The South African rand was one of the few currencies that did not make the most of the broad USD sell-off. Since Monday, USD/ZAR surged 4.3% and hit the 13.00 threshold for the first time since March 15th amid rising political uncertainty. On Monday, Finance Minister Pravin Gordhan was recalled by President Zuma from an investor roadshow to face a court showdown today. Rumours are now circulating that President Jacob Zuma will soon request Minister Gordhan to step down. Finding a potential successor will be a tall order and the uncertainty has caused investors to pull back from sovereign bonds sending 10-year yields up 47bps to 8.80%.
However, the market is used to sudden spikes in volatility caused by Zuma’s government; therefore we expect that pressure should soon return to normal levels as investors resume their hunt for yields. USD/ZAR should quickly return towards the 12.50 level in the short-term.