USD broadly higher after UK elections
(by Arnaud Masset)
The outcome of the UK general election was quite a surprise as the market was broadly anticipating a victory for the Conservatives. Investors had bet heavily that Theresa May would have been able to reinforce her party's support in the House of Commons.
Clearly this is definitely not going to happen.
Against such a backdrop, the pound suffered a sell-off with GBP/USD falling as low as 1.2636, down roughly 2% from yesterday. In fact, with the exception of the New Zealand dollar, all G10 currencies moved in negative territory against the greenback. The dollar index rose 0.45% to 97.36 as the single currency slid 0.20%, the Japanese yen fell 0.30 and the Canadian dollar edged down 0.10%.
We maintain our view that the dollar has been oversold, especially after the ECB reiterated a dovish stance yesterday and the political jitters surrounding James Comey’s FBI dismissal in the US seemed to be a non-event. We expect the USD to get some colour back as investors cut their bullish bet on the EUR and risk aversion is eased.
With events out of the way, buy risk
(by Peter Rosenstreich)
This last week has provided plenty of risk events that shifted investors’ attention from fundamentals and on to flashy headlines.
While the result of the hung parliament in the UK will likely hurt GBP and UK assets for the foreseeable future, the other key events will have only a transitory effect.
While rogue bouts of risk aversion have provided a white-knuckle ride, we remain constructive on EM currencies based on fundamentals.
The drivers of strong capital inflow, which have supported EM assets, are unchanged and are showing no signs of diminishing.
Emerging / developed markets growth differentials will support asset prices. The positive economic surprise in many EM nations has lifted the EM growth outlook. EM GDP for 2017 is expected to come in near 4.5%, well outpacing developed nations' soft 1.8% expansion. Yet, politics both domestically and internationally, such as President Trump's trade policy, provide a significant level of uncertainty to this forecast. Inflations remain in a sweet spot for investors. Solid economic activity, specifically in trade, has pressured price yet soft crude prices has pushed back on the reflation theme. Central banks are likely to keep policy loose as the outlook for energy prices remains subdued.
However, the strongest drive of EM appreciations is likely to be the delay of monetary policy tightening by the big three. Last week, the ECB lowered inflation outlook, which allowed Draghi to provide a dovish tone, despite clear movement toward the exits. The BoJ in comments are ready to let inflation overshoot despite general economic improvement and increasing pressure from politicians to begin normalisation.
Finally, this week's Fed 25bp hike is nearly completely priced in yet the probably of additional hikes in 2017 collapses. Disappointing US economic data (including weak core inflation data) and confusion in Washington has sapped investors’ confidence of 2Q acceleration and therefore an aggressive Fed interest rate curve. With no impending G3 tightening, sustained higher volatility is unlikely benefiting EM in the mid-term.
Overall, global macro environments remain supportive to risk-taking and will further drive flows into EM assets. We continue to favour carry trades but remain nimble for shifts in sentiment.
Switzerland: Safe haven pressures expected amid UK results
(by Yann Quelenn)
That was a surprising result in the UK, Theresa May has lost her bet and did not win a clear majority. Her plan fell apart. A few weeks ago, markets had expected a large Conservative victory. But over the last week, the trend was rather negative for May and Labour leader Jeremy Corbyn’s result overcame expectations.
Now we wonder how this result will impact the Swiss franc in particular. What can be said is that there are more upside pressures on the Helvetic currency. Indeed, negotiations between the EU and the UK that should start next on June 19th promise to be tense.
This is especially because of tensions betweens the ‘hard' Brexiteers and the ‘soft' Brexiteers. European political uncertainties should prevail and no one could really say at the moment what the future UK exit package will look like. We anticipate in the medium-term more move towards the CHF.