Key Week For Donald Trump And Risk Rally

News and Events:

Ahead of key week for Donald Trump

Donald Trump is about to give the most important speech – at least for financial markets – since taking office. Indeed, investors are impatiently waiting for the President to finally explain his plan regarding fiscal spending and tax cuts. Equities across the globe have been rallying strong during the past few weeks, with US indices breaking record levels day after day. The next couple of days will therefore prove a veritable landmine for investors. On one hand, the market’s expectations are very high, however also high is the probability that Trump will strongly disappoint. On the other hand, investors will not hesitate to reload long positions should Trump delivers some bold measures.

Equities are going both ways at the start of the week as investors do not know which way the wind is going to blow. Asian regional markets were broadly trading in negative territory with the Nikkei down 0.91% while in mainland China the CSI 300 was down 0.89%. Across the Atlantic, European equities started the week on a firmer footing with the Euro Stoxx 50 rising 0.30%. Despite this reassuring picture, volatility is on the rise since Friday, suggesting that investors are getting nervous. In the FX markets, most currency pairs were trading sideways this morning.

Divergence in political risk

As Europe hurdles towards the Dutch elections on 15th March, the significance of politics to Eurozone outlook is materialising. EUR has failed to positively react to news of the French political alliance, which suggests a reduction in the probability of a presidential win for Le Pen, despite a narrowing of French vs. German sovereign yields. Lack of volatility indicates that risk aversion has increased as traders brace for a barrage of destabilizing events. We continue to search for opportunity to short the European political landscape and view short EURGBP as the clearest trade. We suspect that European political uncertainty is not merely comprised of singular events, but rather rolling negative sentiment which sees Europe paralysed by breakup fears. This fact will weigh on EUR even should results predict a positive outcome. In the US, the market has become more sensitive to positive economic surprises. Recent Q4 data has indicated strong momentum, despite weakness in consumption and fixed investment, while inflationary pressures continue to build. Manufacturing PMI is expected to increase to 56.4 from 55.9 while Service sentiment will also improve to 55.3 from 54.5. This week, the Notification Withdrawal Bill is expected to be delivered to the committee stage, potentially reducing uncertainty. EURGBP recovery bounce to 0.8535 (capped by 50d MA) should provide opportunity to reload short targeting of 0.8402 support (then 0.8305).

SNB’s intervention accelerates

Upside pressures on the Franc are very important. One euro can be exchanged for around 1.06 franc and the trend shows the euro keeps on weakening. This morning the total sights deposits showed a CHF 4.7 billion increase for last week to CHF 548.2 billion. The pace of the deposits’ growth has rarely been so high.

It is clear for us that the SNB is intervening. The European political uncertainties along with the European mixed economy are pushing the franc higher. One thing needs to be said, the Swiss economy resists well to those pressures. This Wednesday, the Manufacturing PMI is set to increase and on Thursday, the GDP will be released. Financial markets expects a growth increase of 0.4% q/q for the last quarter of 2016.

Those figures are showing that current levels of the Franc are nor hurting that much the Swiss economy. There is nonetheless once concern, the SNB FX reserves are now invested in foreign assets and in particular into US equities. The US rally is providing some unrealized gains to the SNB but the correlation towards the US economy may be dangerous at some point. Equity markets have been told to be undervalued.

The Risk Today:

EURUSD is trading sideways within a fifty-pip range below 1.0600. Hourly resistance is given at 1.0679 (16/02/2017 high) while hourly support can be found at 1.0521 (15/02/2017 low). The technical structure suggests deeper consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBPUSD is trading sideways within a fifty-pip range below 1.0600. Hourly resistance is given at 1.0679 (16/02/2017 high) while hourly support can be found at 1.0521 (15/02/2017 low). The technical structure suggests deeper consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

USD/JPY‘s demand is fading after its increase from support given at 111.36 (28/11/2016 low). Bearish pressures arise around hourly resistance given at 115.62 (19/01/2016 high). The technical structure suggests further weakness around former resistance given at 112.57 (17/01/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF‘s short-term momentum is definitely bullish. The pair lies within an uptrend channel. Hourly resistance is implied by upper bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Expected to see further strengthening. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.