The dominant theme at the start of the week has been further unwinding of the Trump reflation trade. Equities are lower, the US dollar weaker and US yields lower.
This is delayed fallout from the vote on the US health care bill being pulled last Friday. It has seriously fuelled market scepticism over the ability of the Trump administration to deliver on other plans including tax reform and infrastructure spending. In short, the likelihood of a massive fiscal stimulus has reduced (with any tax changes now seen as more likely requiring spending cuts elsewhere). If true, this makes it less likely that the Fed will consider itself getting behind the curve and thus no need to get on a steeper hiking track than it already projects.
Equity markets fell in Asia yesterday, while the Euro Stoxx 50 index closed down 0.2%. US equities opened sharply lower, with the S&P 500 down nearly 1% in early trading, before steadily recovering through the night. The S&P 500 currently sits down around 0.2%.
The DXY US dollar index has continued its decline, dipping to its lowest level since just after the US election in November last year. The index slipped below 99 at one point to be down around 0.9%, before fighting back to sit down about 0.5% currently.
EUR/USD gained ground overnight. At first this was the mirror of the market losing faith in the Trump trade, but the single currency also derived strength from Merkel’s state-election victory, positive comments from ECB officials Lautenschlaeger and Praet, and stronger-than-expected German business confidence. The IFO index lifted to 105.7 from 104.3 to be at its highest level in nearly six years. EUR/USD poked just above 1.090 overnight, before easing back. The pair opens this morning up 0.6% at around 1.0870, just shy of its 200-day moving average that sits around 1.0880.
GBP benefited from the weaker USD showing no signs of fear heading into Wednesday’s expected triggering of Article 50 and the Brexit process. Indeed, GBP sits at the top of the leader board, currently up 0.7% against the USD, close to 1.2560 currently, having been as high as 1.2610 during the night.
Unsurprisingly CHF and JPY have out-performed in the risk-off environment. The USDJPY is 0.7% higher at around 110.60 this morning. Yesterday’s (unsurprising) Bank of Japan minutes following the no change decision from the 15-16 March meeting had little impact.
NZD/USD has largely been on the side lines, trading a tight circa 30pip range overnight after finding mild support yesterday from positive engagement talks between PM English and Chinese Premier Li Keqiang. The NZD opens this morning around 0.7040. NZD/AUD sits close to 0.9240. Note the RBA’s Deputy Governor Debelle is talking this morning in Sydney.
The NZD has held up well despite risk appetite gradually deteriorating over the past week or so. The VIX fear index spiked up to 15 overnight, its highest level since November, before easing back. Deteriorating risk appetite has pulled our NZD/USD fair value model estimate down, but at just under 0.73 it is still supportive of the NZD from current levels. Technically, there is decent NZD/USD support just under the 0.69 level. Short-term resistance levels are harder to see, with solid resistance not in sight until about 0.7250.
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