Market attention has turned to the health bill to repeal Obamacare that faces the US Congress this week and Trump doesn’t have the numbers to pass the bill at this stage. For Trump, it is important that the health bill passes, as savings from lower health expenditure are to be used to help control the deficit and allow his tax reform policies to proceed. The market is losing patience as the chance of tax reform and fiscal stimulus seemingly recede by the day. This threat is seeing the post-election rally unwind, with the USD major currency TWI down 0.5% for the day.
There are other factors in play contributing to a weaker USD. GBP/USD is up 1% to almost 1.25, as CPI inflation data were much stronger than expected, testing the BoE’s tolerance for higher inflation. Market pricing for a rate hike was brought forward a touch, but OIS pricing still suggests it’s a distant prospect, more like mid-to-late next year. Some of the rally in GBP likely reflects it being oversold on the “news” yesterday that Brexit would be triggered on 29 March.
EUR/USD is up 0.7% to 1.0810 and flirting with its 2017 high, supported by polls showing centrist Macron as the winner of the first French presidential debate on Monday. There is also some residual buying as investors ponder the ECB eventually withdrawing policy stimulus, helping to lift German bund yields at a time when US Treasury yields are heading south. The US-Germany 10-year spread fell to a 4-month low of sub 200bps, which supports EUR.
The risk off mood, with the S&P 500 down 0.9% and the VIX index up 10% to 12.5, sees the NZD and AUD languishing near the bottom of the leaderboard alongside the USD. NZD is trading around 0.7050, a touch above the local close yesterday but it spiked as high as 0.7090 this morning following the surprisingly positive result from the latest GDT dairy auction. The GDT price index rose by 1.7% against expectations for a circa 3-5% fall. Whole milk powder rose by 2.9%. This suggests some consolidation in pricing, after the significant fall over the last month or so. The next focus for the market is the RBNZ statement tomorrow. Compared to the February Statement, the Bank will have to delete reference to the “continued upward pressure” on the NZD after its significant fall over recent weeks but the RBNZ is still likely to consider the NZD “higher than is sustainable”, something we’ve disagreed with for some time.
NZD/AUD is around 0.9145, helped by the positive GDT auction, while the stronger GBP and EUR sees NZD/GBP down to 0.5650 and NZD/EUR down to 0.6525.
NZD/JPY is trading this morning sub-79, given the risk-off mood and lower Treasury yields.
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