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Uncertainty Clouds Dollar Outlook

Daily Analysis - 26/02/2017

Unknowns over Fiscal and Monetary Policy Sends US Currency Lower

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Comments from Treasury Secretary Steven Mnuchin combined with weaker employment fundamentals and reduced speculation of a March rate hike have seen the dollar give back ground overnight, pushing gold prices back above the longer-term $1250 per troy ounce level.

Policy Setbacks Send Dollar Lower


The dollar gave ground on Thursday and during the overnight Asian session as concerns about the proposed timelines for the Trump Administration’s ambitious tax reform and infrastructure spending plans encountered new hurdles.  In comments on Thursday, Treasury Secretary Steven Mnuchin failed to provide new details regarding Trump’s tax plan aside from the fact that the Administration wants the measures passed before the August congressional recess.  Despite reiterating the commitment to reform the current tax code, details were sparse apart from the oft repeated middle class tax relief and simplification of business tax reporting.

Furthermore, concerns about infrastructure spending being postponed alongside a smaller probability of March action on interest rates were enough to spur additional losses in the US dollar.  Gold prices pushed higher, climbing to the highest point in months on the back of renewed uncertainty and dollar softness.

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US Crude Output Hits New Cycle High


Weeks of rising drill rig counts have led to another gain in US crude oil production as evidenced by the latest data presented by the US Department of Energy.  According to the weekly EIA report, crude oil output reached 9.001 million barrels per day last week, marking a new cycle high for production after significant production was taken offline in reaction to pricing weakness in 2016.

Oil held in onshore inventories also continued to rise, marking the 7th straight week of gains for stockpiles after the addition of 564,000 barrels.  However, besides the build in crude oil, nearly all other categories of storage fell to a degree, with gasolines stocks falling by 2.628 million barrels during the same period.  After running into resistance ahead of $55.00 per barrel on Thursday, WTI futures are back on the retreat, trending towards $54.00 per barrel.

 

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French Bond Yields Fall As Centrist Alliance Emerges


After a significant dip in French bond prices recently forced yields significantly higher compared to German bunds on the back of Marine Le Pen’s surge in the polls, the announcement of a new centrist alliance helped ease yields on Thursday.  Emmanuel Macron, the independent candidate who formed a new political party less than a year ago, has found himself polling ahead of Conservative Francois Fillon following his decision to make a pact with Francois Bayrou.

After three failed presidential bids, Bayrou is expected to help the newcomer thanks to his past experience and potential endorsements that could arise as a result.  Even though Le Pen is still expected to win the first round of voting, the new alliance could potentially propel Macron to the presidency depending on how the campaign evolves.  In the meantime, the French CAC 40 closed flat on Thursday, opening slightly lower on Friday.

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Brussels Takes Harsher Tone Towards Brexit


As the March initiation of exit negotiations rapidly approaches, the European Commission is lining up behind measures that would force the United Kingdom to jump through new hurdles when it comes to leaving the European Union.  The EU is now insisting on guarantees for the UK that could top €60 billion as assurances of their willingness to negotiate in good faith and honor commitments as a member state.

However, this more hardline stance could create more friction as the UK pushes the idea of parallel negotiations with individual member states when it comes to trade.  The result of the latest push by the European Commission is a greater probability of a hard Brexit in which the UK loses all access to the single market mechanism.  The EURGBP pair is bouncing in early trade after trending lower the entirety of the week, failing to overcome earlier losses.

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