Market movers for the week ahead – Rabobank

There have been a number of technical signals in recent weeks suggesting that the USD could be poised to break higher, feels the research team at Rabobank.

Key Quotes

“The market’s lack of confidence in Trump’s ability to win legislative change has meant that every small piece of positive news recently on the budget has been viewed as a surprise.  There is still a long way to go before Trump’s tax reform is passed into law, but treasury yields did rise last week as the market contemplated the possibility of larger fiscal deficits and higher inflation.  Higher yields are a supportive influence for the USD.”

“Markets are hoping that the question of who will be leading the Fed after Yellen’s term end in February may be answered this week. Taylor, Powell and Yellen are considered to be Trump’s favoured candidates, with Taylor considered to be the most hawkish of these candidates.”

“The market is keenly awaiting direction from the ECB on tapering into 2018. Despite the central bank’s denials, the market is still speculating that supply constraints could influence the Governing Council’s thinking.  Bearing this in mind, we are assuming that the ECB’s bond purchases will be cut from EUR60 bln to EUR40 bln from January onwards, then EUR20 bln from April and zero in July.  This puts our view on the hawkish end of the tapering spectrum.”

“As widely expected Czech billionaire Andrej Babis’s populist ANO (Action of Dissatisfied Citizens) movement won the weekend general election, obtaining almost 30% of the vote. The rightist Civic Democrats (ODS), which strongly opposes the Czech Republic adopting the euro, finished second with 11.3% of votes followed closely by two anti-establishment parties represented by the Pirates with 10.79% and the far-right Freedom and Direct Democracy Party (SPD) with 10.6%. It was a very heavy defeat for incumbent Prime Minister Bohuslav Sobotka’s Social Democrats (CSSD) and its coalition partner KDU-CSL who suffered from rising anti-establishment and anti-migration sentiment driven by the refugee crisis. Despite its landslide victory, the ANO will need a coalition partner.”

“A continuation of the current coalition government, though now under ANO rather than CSSD leadership, together with the Christian-Democrat KDU-CSL, would be the most market friendly outcome. That said, before elections prominent officials from the CSSD and the KDU-CSL indicated that they are reluctant to form a government led by a prime minister who faces criminal charges. Essentially, the main obstacle to reach an agreement could be Babis.”

“The topics of Brexit uncertainty and Tory cabinet division are set to continue this week. According to the Times newspaper, UK Chancellor Hammond has been warned he faces a rebellion from within the government over next month’s budget.  Under the veil of political uncertainty, this week’s UK economic data which include a CBI trends survey, the Q3 GDP report and consumer credit data are expected to show signs of sluggish growth.”

“Another highlight this week will be the BoC policy meeting and data releases which include PMIs for October in addition to US durable goods.”