Daily analysis 27.03.2017

Both the dollar and the profitability of the American treasury bonds have lost their value, due to the lack of agreement regarding new American healthcare regulations. The emerging market currencies continue to benefit from a moderate increase in the risk aversion. The zloty remains very strong.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact the analyzed currency pairs.

Canceled regulations. Taxes at the center of attention

Before the ending of the American session on Friday, it appeared that the Republicans have withdrawn from voting over new American healthcare regulations. At that time, this has not caused larger moves in the market. However, today’s Asian session brought a significant decrease in the dollar’s value, as well as in the profitability of the American treasury bonds.

The USD/JPY, which is the most sensitive to changes regarding the future interest rates, was pushed to the area of 110. This is its highest level since November 18th. Moreover, worse condition of the American currency has caused the EUR/USD to reach its highest level since December (1.0870).

Reduced expectations regarding the future interest rates have been reflected in the behavior of treasury bonds. The profitability of the five-year bonds went below 1.9%, after testing the area of 2.15% in mid-March. The beginning of the American session can also be marked with an increase in the risk aversion. The S&P terminal contracts are approximately 1% lower than they were at the end of Friday.

This means that the market was clearly negative towards the lack of the House of Representative’s decision regarding healthcare regulations. The sentiment has not been improved by the declarations about focusing on the tax system from both the White House and the Republicans. On Friday, President Donald Trump claimed that, “So now we’re going to go for tax reform, which I’ve always liked.” Moreover, Paul Ryan of the Republicans said that, “Now we’re going to move on with the rest of our agenda because we have big, ambitious plans to improve people’s lives in this country.”

However, investors are starting to doubt that this reform will be conducted rapidly. Primarily, healthcare regulations were to generate savings, in order to partially reduce the cost of the tax changes. Secondly, cooperation between the Congress and the White House is not as effective as it was previously expected. The third argument is the fact that the details of the tax system changes remain unknown.

President Donald Trump wanted to lower taxes for companies by 15% and the Republicans have been supporting the idea of a 20% reduction. Moreover, the White House is not convinced to the Border Tax Adjustment, whereas Ryan’s plans have assumed that the income from taxes regarding import was to reduce the costs of lower fiscal burdens for both companies and households. Therefore, if the Republicans do not wish to accept the higher budget deficit, this promise may never be fulfilled.

We may try to build an alternative optimistic scenario. The lack of agreement regarding healthcare regulations may mobilize the White House, as well as the Republicans, to undertake more specific actions in order to rebuild the trust of the voters. However, it seems that this plan requires a coherent plan regarding tax changes. Until such plan is revealed, investors will most likely remain skeptical, which would be negative for the dollar.

Zloty and emerging market currencies remain strong

The ruble shows how strong the positive sentiment towards the emerging market currencies actually is. Since the beginning of March, oil has lost approximately 10% of its value. However, the Russian currency is at its highest level against the dollar in approximately eighteen months. This positive trend also applies to the Mexican peso or the Brazilian real.

Investors don’t fear that the current American problems would translate to a strong increase in the risk aversion, which would cause the capital to leave the emerging markets. Moreover, reduced expectations regarding rate hikes in the USA has increased the attractiveness of the emerging market bonds. However, it will be difficult to sustain this trend, if the sentiment changes.

The zloty, as one of the emerging market currencies, is in the same situation. Therefore, we can say that the current declines in the stock exchange markets, as well as lower profitability of the emerging markets, should support the zloty against the main currencies. However, extreme scenarios may cause an intensive wear-off of the PLN.