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EUR loses ground despite Macron win
Macron wins French Presidency
As widely expected by polls, Emmanuel Macron won the French Presidency with a clear advantage (65% over 35% for Marine Le Pen). Financial markets barely reacted and the single currency is still trading below $1.10. It is worth noting that the euro climbed anyway at 6-month high.
Regarding stocks markets, they were opening lower this morning as investors certainly took profit from the last two weeks’ increase. It seems that there is no relief rally. We believe that this relief rally already happened after the first round. Nonetheless, one may assume that the relief rally are coming from the bonds market where French yields are weakening.
Now, the tricky part is going to come. markets are still unsure if Macron will be able to govern as he needs the majority at the French parliament (the famous third round) which may be difficult to achieve. Indeed Macron’s party “En Marche !” is very young.
Last but not least, Macro mentioned in his speech that he will not give Britain an easy Brexit deal and this may weigh on the pound in the medium term. The British currency was by the way trading mixed this morning.
US jobs report failed to boost USD
Last Friday, the last US labour market report surprised on the upside as the economy created 211k private job in April, beating forecast of 190k. Previous month’s reading was revised slightly to the downside (79k versus 98k first estimate). Similarly, the unemployment rate slid to 4.4% from 4.5%, while the participation rate ticked down to 62.9%. Investors did not get carried away as weak wage pressure remains a significant hurdle for an acceleration of the US economy. Average hourly earnings grew 2.5% year-over-year in April, down from 2.6% in March.
Now that the French election is over, the market will switch focus towards the US. Indeed, the next couple of months will be key for world’s largest economy and global markets. Trump’s reform plan and a potential tightening move from the Fed at its June meeting will be the main driver for now.
Despite Macron’s victory, the greenback started the week on a solid footing, rising roughly 0.40% against the euro, 0.50% against the NOK and 0.30% against the Swiss franc. Asian EM held ground, while European ones moved in negative territory. We expect the dollar to start picking up pretty soon.
Commodity linked CAD Vulnerable
Saudi oil ministers Al-Falih indicated that oil production cuts would likely be extended (which makes sense given the weak oil price). There increasing expectation that the summer driving season will drawdown inventories putting pressure on oil prices. Yet it’s unlikely that OPECS supply side efforts will transfer into the broader crude markets. US oil producers have become extremely nimble in reacting volatility in demand. Baker-Huge data release Friday indicated that rig count increased to 703 the highest levels in April 2015. While the recovery rally in crack-spread suggest that additional player will step into the markets to gain additional refining margins.
Oil prices have been able to climb off the technical support low at $46 brl. However, Relief rally in commodities especially raw material prices fails to have any fundamental rational and gains in commodity-linked currencies are not likely to get sustained buying. CAD was able to find demand on the back of stronger oil prices but with weakness creeping in and markets expected to turn its focus back onto the Fed, USDCAD should head higher. USDCAD bullish trend is valid regardless of Friday reversal pattern, pause at 1.3650 further expectations that supply has been absorbed (IMM showed extension of CAD shorts). Canada will release April Housing Starts which expected to rise 215k after a strong 253k March read. A weak read will reinforce Canada’s softer economic growth outlook highlighted by the BoC.