International politics are heating up – Nordea Markets

According to analysts at Nordea Markets, fears that President Trump would put his so-called cronies in charge of the Fed have not materialised  – this may have eased a “Trump risk premium” which may have been present in the dollar.

Key Quotes

“While a civil war of sorts continue to be ongoing in US politics, those who have been waiting for an impeachment process against the President has had to wait, and wait for a smoking gun in Russiagate. Instead, President Trump’s approval rate is in a rising trend, and the political winds have started to favour the Republicans ahead of the November election, though they face a stiff uphill battle. The worst trade fears have also failed to materialise (so far).”

“This list provides us with  non-fundamental factors which might cause problems for dollar bulls. The White House seeking tariffs on auto imports and the decision to cancel the June 12 summit between the US President and North Korea’s Rocket Man serve as helpful illustrations, albeit mild ones.”

“While we judge tariffs on auto imports to be fundamentally dollar-positive down the road, we think the near-term reaction would be to weaken the dollar.”

“Before turning way more unorthodox, let us comment on the Euro area.  EA growth expectations have started to be revised lower.  The consensus forecast for 2018 has been cut to 2.3% from 2.5% a couple of weeks ago. Further, negative, revisions are likely.”

“And adding to the woes for the ECB, both Italian and now also Spanish politics have entered the frame once again.”

“The cocktail of both Italian and Spanish political turmoil took its toll on EUR bond markets on Friday. There is a clear risk that an even wider Italy-German 10yr spread, will start to spill-over substantially to other EMU assets. Especially since Draghi and co will likely not stand ready to underpin markets (or credit specifically) in a way that is comparable to earlier times. After all, sources told the media on Friday that there is still uniformity within the ECB in the expectations that QE will be phased out this year.”