UK elections, Donald Trump, NFP Friday on 2nd June and so much more. Market uncertainty and volatility are back and there are a lot of factors which traders need to consider. Here is an interesting article, from the professional trader Malte Kaub, for an insight into how traders can navigate the markets through this unprecedented uncertainty.
European currencies seem relatively cheap, but...
From the long term perspective the regional asset class still seems to be not too expensive, although the value of European currencies already looked attractive a short while ago The underlying fundamentals remain in good shape and growth has picked up across the EM world.
...keep an eye on Italy - A problem far from being solved
As we get more comfortable with France's political risks after the election, the capital markets attention shifts towards Italy again. Despite Italy showing positive growth in recent years, the economic outlook was not strong enough to address concerns on medium-term public debt.
With the ECB’s financial market complacency potentially fading as the central bank progresses with its plan to slowly normalize monetary policy conditions, Italy seems to be exposed to swings in market sentiment.
It will be critical to drive the reform agenda to regain financial market confidence. Priority should be given to accelerating banks’ balance sheet repair and implementing growth-friendly fiscal policies compatible with maintaining a meaningful primary surplus. Such measures will be received very well by the markets. Next year’s elections are likely to be held under an improved voting system, reducing the risks of a hung Parliament.
Nevertheless, Italy will most likely continue to underperform its peers until we see some real improvements towards reform and stability resulting in increased Italian sovereign risks. Keep an eye on the difference in Italian capital costs vs. German (CDS Spread Italy/Bund).
As the EUR looks still promesing, 'CABLE' vulnerable and YEN seems stronger
Sterling has fallen ahead of the elections, in the UK on 8 June 2017, on the news that some polling groups in the UK have the race between May & Corbyn narrowing sharply.
Only about a week ago it seemed to be a certainty that Theresa May and the Tories were on the verge of a landslide victory in the impending election, evening winning bigger than Margaret Thatcher. Now, apparently, May is still believed to win the election but their once expected landslide majority has dwindled to a mere pleasant majority instead. As a result, “Cable” (GBPUSD) has fallen sharply.
The Yen is stronger too and since there is no material economic news to really drive that strength it can only be related to the troubling reports from North Korea and its potential ability to knock-out Japan’s electrical grid. Many Japanese have moved their money from abroad as a safety measure. A factor one should never underestimate!
US Interest Rate Scenarios - Fed most likely to raise interest rates in June and September
The Federal Reserve left monetary policy unchanged after the FOMC meeting on 3rd May, as widely expected.
The May FOMC meeting notes made an attempt to downplay the weak US Q1 GDP numbers as “likely to be “transitionary”.
US March inﬂation data was relatively soft. Participants generally thought that inﬂation would stabilize around 2 percent. Most meeting members also noted that “it would soon be appropriate” for the FOMC to hike again. The minutes also highlight new information about the eventual process for phasing out reinvestment, which will likely occur by “preannouncing a schedule of gradually increasing caps to limit the amounts of securities that could run off in any given month.”
From a data perspective, this as a pretty low bar. There is a good probability of a rate hike at the June meeting and expect this to be followed by another rate hike in September and the announcement of balance sheet normalization at the December meeting.
The Fed is expected to raise policy rates two more times this year, in June and September, to 1.50% and three times in 2018 to 2.25%. The risks to the timing of the balance sheet announcement is skewed toward the September meeting, in which case the third rate hike of the year would likely be deferred. Most models still favor the FED to raise interest rates again twice this year and three times in 2018.
Potential Market Implications - USD/EUR/JPY/GBP
The USD is prone to slide with the failure of US policy to deliver results. Market expectations are probably priced into the USD already. A mid-term EUR rally is getting more likely now the political risk of the French election is behind us. The general hypothesis, of USD strength fading and the EUR rallying in H2 2017, is still intact. Medium term, the EUR/USD could reach 1.20 and USD/JPY at 100. The downside scenario for GBP is now more limited, with GBP/USD less likely to dip deeply below 1.20.
Even if fiscal policy could be loosened, any upside for the USD could be offset by concerns about a widening budget deficit and rising debt.
The flipside to this weaker USD profile will be most apparent in the EUR. Political risk in Europe has faded, and will likely be replaced by a justified market fixation on the ECB’s exit strategy from ultra-accommodative monetary policy.
The GBP, relatively speaking, looks a bit stronger against the USD looking for 1.20 at the end of 2017 and not as far as 1.10.
About the Guest Writer
Finance professional with more than 10 years of deep experience in trading. His expert knowledge and network has compressed the learning curve for traders of all experience levels.
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