USD’s dead cat bounce
The euphoria that surrounded President Trump’s tax plan announcement did not last long as, surprisingly, he failed to provide concrete policy details. After starting the day on the front foot, the US stock market reversed gains and pushed most indices into negative territory. European markets followed Wall Street leads and opened below the neutral threshold on Thursday, with the Euro Stoxx 600 sliding 0.40%. In the FX market, the US dollar was unable to consolidate pre-announcement gains and lost ground against most G10 currencies.
The Canadian dollar was the best performer this morning as it rose 0.35% against the greenback, erasing yesterday’s losses completely. After tumbling earlier this week when Trump slapped tariffs on imported Canadian softwood lumber, the loonie got a breath of fresh air amid a declaration that the US will not terminate NAFTA ‘at this time’ but would rather try to re-negotiate the treaty.
Since the threat of the US leaving NAFTA was the biggest headache for Mexico and Canada, we anticipate that selling pressures on the CAD and the MXN will ease further. However, we believe that we won’t see a sharp rally as the unpredictability of Trump will keep investors on the defensive.
Draghi set to show optimism in Eurozone recovery
Today’s European Central Bank meeting is in the middle of the French Presidential election and the European institution certainly welcomed Emmanuel Macron’s victory in the first round as there were certainly fears of a second round pitting Jean-Luc Mélenchon against Marine Le Pen.
Now ECB President Mario Draghi, whose press conference will be given at 1.30pm CET, is going to discuss his views regarding the Eurozone recovery. For the time being, it is very likely that the current level of asset purchases (€60 billion) will continue until year-end. We believe that for some more time, the ECB will remain committed to low rates.
Financial markets are clearly not pricing anything else but a Macron victory in France, which seems to rule out any political risks for the ECB. In Europe, economic fundamentals are better, inflation is picking up and unemployment has decreased, even though it remains very high in peripheral countries. So this meeting will be useful to assess the degree of optimism that could lead to a tightening policy in the near future. Markets are likely to price in better confidence and we remain bullish on the Euro in the short-term.
