Yield seeking dominates FX
(Peter Rosenstreich, head of market strategy)
The USD continues to lose ground as US yields back off highs following the dovish Fed. EM FX has gained meaningfully against the USD (marginal pause today), while G10 currencies are less directional. The broad sentiment is that markets are again in a “goldilocks” phase with accommodating monetary policy dominating and political risk emulating from the US and European deceleration. With the Fed keeping the Dots unchanged and PVV's disappointing result in the Dutch elections, investor short-term fears have faded. FX volatility as shifted lower, giving investors renewed reason to changes yields. We are concerned that the market is underpricing the probability of the Fed rate hiking cycle continuing in June. In FX, carry and momentum trades are positing significant risk adjusted returns. Buying of EURUSD has increased in popularity as shallow Fed policy path seems to collide with ECB tightening in September. As we have stated in numerous forecasts, it is unlikely that the dollar will dominate 2017. Trading long EURJPY would be the highest conviction strategy for this Fed/ECB convergent trade. This weekend, the G20 finance ministers and central bank will meet. In broad terms, the G20 has had time to find consensus or to provide real solutions making for limited statements. Given the concern with the rise of populism and protectionism, there will clearly be some notable headlines heading over the wire. However, it is unlikely any splashy comments will have a lasting market impact. Specific focus will be on US Treasury Secretary Mnuchin regarding USD policy and global trade. On the surface, Mnuchin has indicated a comfort level with a stronger USD yet should the Fed trigger global rotations into USD, we suspect that the administration will act. When the hype from the G20 clears on Monday we should see a “greenlight” for extensive risk taking. On the docket today, the US will release industrial production and Michigan sentiment which are both expected to see further improvements.
EUR upside remains limited… for now
(Arnaud Masset, market analyst)
The single currency had a nice ride after the last FOMC meeting and the dovishness of Fed members regarding the pace of rate normalisation. However, the easing political uncertainty that stems from the rise of populism across EU members has also helped the EUR to get some colour back. The game is not over yet as the French election remains the major hurdle for further EUR appreciation. Since yesterday evening, EUR/USD has been testing a key resistance area at between 1.08 and 1.09 (previous highs and 200dma that currently stands at 1.0896). We do not expect a clear break of these levels before the French election; however the market will be extremely sensitive to upcoming economic data from the US as it could slow down the Fed tightening path.
As we approach the first and second rounds of the French elections, the classic safe haven currencies - CHF and JPY - should perform well against the backdrop of political uncertainty and doubt about the strength of the US economic recovery.
UK unemployment falls to 42-year low
(Yann Quelenn, market analyst)
What a contradiction! The expected economic nightmare triggered by the Brexit vote has not materialised. Indeed, unemployment rate has reached its lowest level in 42 years at just 4.7%. It seems that at least for now, the UK economy is not the worse off from its decision to exit of the European Union. Nonetheless, it is worth noting that pressure on wages are almost non-existent. In our view, the increase in part-time employment is also pushing the unemployment rate lower.
Earlier this week, the BoE decided to keep its interest rates on hold at 0.25%. It is clear that Brexit fears are definitely helping the central bank as the pound remains weak. We maintain our bullish view on the pound and we see European uncertainties growing in the medium term, in particular given the French Elections.
When looking more specifically at data, inflation is on the rise and we should see the BoE hinting to further tightening in the future. The triggering of the article 50 looms and negotiations are likely to last longer than expected as trade agreements are paramount for the future UK competitiveness.