Market friendly French election result has seen an increase in global risk appetite; NZD, however, has not benefited from this and is trading at 0.6950 USD and 0.9220 AUD; EUR remains in favour and JPY suffers

By Jason Wong

Locals will return from the ANZAC day holiday to see markets still in a risk-on mode, buoyant from a market-friendly French Presidential  election result, but that mood hasn’t followed through into the commodity currencies, which have languished.

After yesterday’s 1.1% rise in the S&P 500, the index has added another 0.7%, taking it a fraction below the record high set in early March.  Meanwhile the Dow Jones index is back above 21,000 while the Nasdaq index is up through 6000 for the first time ever.  It’s back to risk-on, as markets continue to absorb the positive French Presidential election outcome, with robust economic data and some better earnings results playing a supporting role.  US home sales were strong and while consumer confidence was slightly below expectations, the index level remains historically high.

The VIX index has moved significantly lower and is now close to its lowest level this year at 10.5, after trading near 15-16 ahead of the French election.  This takes our risk appetite index back up close to 80%.  With a move like that, one would normally expect the NZD to have surged ahead, but somewhat strangely it has moved in the opposite direction and trades this morning around 0.6950, taking it further away from our short-term fair value estimate, which has pushed up to 0.74.

It doesn’t make any sense to us why the NZD has ended up one of the weakest major currencies (second weakest to the safe-haven yen) over the past couple of days, just as risk appetite has surged ahead.  It doesn’t make much sense why I had such a bad round of golf yesterday after my best round in a year on Saturday either.  These things just happen.

Commodity currencies are out of favour.  The CAD has been in the spotlight, falling to a 14-month low against the USD after President Trump imposed tariffs on Canadian lumber and products and criticised the nation’s dairy policies. Oil prices are also struggling, as investors remain concerned about the strength of rebounding US oil production and reduced faith that OPEC can support prices with its production freeze.  WTI prices are up slightly but still below $50, after falling for six consecutive days.  Still the NZD has underperformed, with NZD/CAD down to 0.9435.

NZD/AUD is down to 0.9220, even as the AUD loses ground and is hovering around 0.7535.  Australian Q1 CPI is the only key global economic release over the next 24 hours so that will get the market’s attention.  Annual headline inflation is expected to head back into the 2-3% target range, with core measures edging up to 1.8%.

EUR remains in favour with French political risk out of the way, hovering hear its highs for the year around 1.0940.  The ECB will look at the reduced political risk favourably, but isn’t expected to change much its policy language this week, likely saving any major change until the June meeting.  Some positive spill-over onto GBP is evident, as the market looks to an increased majority for the current government in the early-June snap UK election.  GBP is 1.2830.  With an underperforming NZD, the crosses are soft, with NZD/GBP down to 0.5415 and NZD/EUR down to 0.6350, fresh lows for the year.

The risk-on environment sees USD/JPY up through 111, while NZD/JPY is up slightly to 77.2.  The USD indices remain near their lows for the year, not helped by the resurgent euro.  Trump intends to lay out broad tax principles on Wednesday (US time), including cutting the federal corporate tax rate to 15% from 35%.  The market is keen to see whether any tax plan is revenue-neutral or permanent.    If a tax overhaul adds to the deficit after the initial 10-year window, then that would run counter to Senate budget rules for what can pass the Senate with a simple majority.  In other words, Trump’s tax plan would be unlikely to see the light of day in a permanent way unless it is deficit-neutral.

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