Trump dumps, emerging markets reactBy Peter Rosenstreich
America’s withdrawal from the Iran non-nuclear pact resounded in emerging markets. TRY reached a record low against the USD, as the President Trump’s move threatens stability of Turkey’s border and its access to oil. Argentina’s currency crisis continued. Banco Central de la Republica Argentina has raised interest rates 1.275% in two weeks (40%) and requested support from the International Monetary Fund. Argentina is heavily funded in USD, having spent over $5 billion to support its peso. Rising USD interest rates and extreme geopolitical uncertainty are key ingredients for a deeper sell-off in emerging markets. Traders have underestimated fundamentals risks. This unwind is not likely to let up anytime soon. Reaction in other markets was broadly muted as Trump’s withdrawal was expected. Oil climbed marginally, with Brent hitting a 3-year high at $77.10. US 10-year T-bills were just below 3.0%.
America’s withdrawal was not unexpected, given Trump’s years of criticism and general hatred of former President Barack Obama. The move has increased risk in the Middle East, jeopardized US relations with allies and reintroduced oil supply concerns. All in a days work for this president, who thrives on disruption and drama.
Sweden keeps rates unmovedBy Vincent-Frédéric Mivelaz
The Riksbank is not having an easy time: its monetary policy meeting on 26 April concluded with a maintaining its key rate at -0.50%. The minutes from April, just released, confirmed the bank’s willingness to raise interest rates this year (expected year-end), probably earlier than the European Central Bank. USD/SEK gained 1.68 while EUR/SEK lost ground, lowering by -0.56% (year-to-date: +7.75% and +6.18%), suggesting strong USD momentum since the beginning of February. We would favour short USD/SEK and EUR/SEK positions. Both pairs are currently trading at 8.79 and 10.42, heading to 8.7695 and 10.4060 in the short-term.
Inflation data released this morning hint towards a postponement of a normalization next year. Given at 0.40% and 1.70% on month-to month and year-to-year basis (prior: 0.30% and 1.90%), consumer prices are disappointing. Should these remain so in coming months, a delay is most likely. Still, with a take off in domestic consumption and a recovery in March’s trade balance, a rate hike in 2018 is still likely. The odds remain low, but an increase in September earliest (expected in October or December) is feasible.