US: Political risk crosses the Atlantic - Westpac

In view of Sean Callow, Research Analyst at Westpac, halfway through Q2 2017 and the tables have turned dramatically, at least in terms of political risk which is driving the global financial markets at the moment.

Key Quotes

“The US dollar started this year buoyed by optimism that the Trump administration would be able to implement an aggressive pro-growth agenda. This reinforced existing support for the US dollar from the Fed’s plan to keep raising interest rates. Meanwhile across the Atlantic, the euro was hampered by the ECB’s ongoing QE program and notable political risk. Elections in the Netherlands, France and Germany loomed, with fears of a Brexit/Trump surge by nationalist parties hostile to free trade, immigration and the euro itself. EUR/USD traded below 1.04.”

“Halfway through Q2 and the tables have turned dramatically, at least in terms of political risk. The far right performed poorly in the Netherlands, was trounced in this month’s French presidential run-off and has faded in German polls, with Chancellor Merkel in a strong position heading into September’s elections. Meanwhile in Washington DC…”

“Australian markets are increasingly used to US political bombshells early in our trading session, after Wall Street has closed. Much of this has limited market relevance. But there was no disputing the reaction to the NY Times allegation that President Trump asked then-FBI director Comey to drop the investigation into former national security advisor Flynn. Senate majority leader McConnell had already grumbled that the White House was not helping Congress focus on the economic policy agenda.”

“However the Russia investigation(s) proceed, investors are likely to lower their hopes for passage of legislation on tax reform, infrastructure etc given the political distractions. The chart shows that the USD selling last Friday actually kicked off with soft April retail sales and CPI data. Pricing for a June Fed hike has slumped from 88% to 65% over the week. We do still expect such a move, which should help USD next month. But near term, it will be very hard for the dollar to ignore the American-made political risk.”