As political risk continues to dominate the headlines (even as US equities steadfastly refuse to efficiently price it), FX markets will likely remain in the spotlight.
The dollar is grappling with an increasingly Draconian stance from the White House regarding trade, but traders are still acutely aware of the Fed’s supposed desire to get in at least two hikes in 2017. Friday’s jobs report was greeted with a conspicuous amount of skepticism thanks to a weak read on wage inflation, giving ammunition to those pushing for a more “gradual” tightening pace. Expect chatter around SOMA rolloff to increase commensurate with the administration’s desire to put a lid on dollar strength as any tightening that does transpire may be shouldered by the long end in an effort to anchor short end rates.
In Europe, Marine Le Pen is ratcheting up the euroskeptic rhetoric in lockstep with Trump’s combative approach to immigration. Here’s a summary of Le Pen’s Sunday comments via Bloomberg:
- Le Pen, who didn’t directly mention an euro exit, says she would negotiate with the EU to regain the “four sovereignties: monetary, legal, territorial, economic” adding that if the EU didn’t “bow” to her demands she would call a referendum to exit the EU
- “The dysfunctional system” of the euro and the European monetary system is “ruining France”
- “Let’s make it a bad souvenir,” Le Pen said about France’s EU and euro memberships
Needless to say, that puts pressure on the euro as traders attempt to price the unpricable: a French black swan.
Meanwhile, Friday saw the Bank of Japan reasserting its power over 10Y JGB yields as the market questioned Kuroda’s resolve after the central bank failed to intervene to put a lid on yields Thursday. With the pressure on, it’s effectively Trump versus Kuroda. If the BoJ fails to step in and anchor JGB 10s (i.e. preserve the YCC story), it will be seen as an admission of guilt with regard to the currency manipulator label.
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