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Video / 21 March 2017 at 8:31 GMT

From the Floor: Trump faces 'litmus test' — #SaxoStrats

   • Trump trade faces key 'litmus test' as Obamacare vote goes to Senate — Hardy
   • Dollar direction likely to be dependent on outcome of vote
   • EURUSD rises as Macron confirms credibility in French election debate — Hardy
   • Oil stabilises as long positions sharply reduced from February 21 high — Hansen 
   • Gold unable to break above $1,238/oz despite dollar weakness — Hansen
   • Coffee on the march as Vietnam production hits five-year high
   • US 10-year Treasuries yields coming down on elevated risk — Boye

By Martin O'Rourke

Merry litmus

The dollar weakness of the last few days is extremely unlikely to change ahead of the pivotal Obamacare repeal vote in the Senate Thursday when US president Donald Trump will be hoping to toast a decisive victory as he bids to put an end to a key pillar of ex-president Barack Obama's domestic policy.

While the legislation itself is not hugely significant in terms of markets, 
says John J Hardy, Saxo Bank's head of forex strategy. it will be a clear indication as to what exactly US president Donald Trump may need to overcome if he is to push through his anti-establishment reform agenda.

"The Obamacare vote is a real litmus test," says Hardy.  "Anything that happens with the technicals until then will have to be taken with a grain of salt but it has very important implications for the so-called Trumpflation trade that has seen dollar bid up since the November election."

Dollar may have largely stabilised against most of its major peers overnight but one potential exception is EURUSD which enjoyed a fillip over night after Emmanuel Macron did enough in the French presidential debate to strengthen his credentials as a likely winner in the second round of the elections set for May 7.

"Not only did we see German/French 10-year spreads come in a few basis points, we also now see EURUSD staring down the 1.08/0850 zone," says Hardy.

EURUSD was at 1.0784 at 0755 GMT.

EURUSD staring down the 1.08/0850 zone
 Source: SaxoTraderGO

If euro is frothing, it's a slight retreat for sterling back to below 1.24 after it was bid up over the last week and key CPI data for February this morning at 0930 GMT could be the catalyst for the next big move in GBPUSD.

"It's very important especially after we saw some dissenting voices in the Bank of England meeting last week on the next move in interest rates with Bank of England member Forbes wanting to pull the trigger," says Hardy. "This is a two-way risk for sterling as good data could help it back up but a disappointment will see it lower."

GBPUSD retreated late Monday after UK prime minister said Article 50 of the Lisbon Treaty will be triggered on March 29, setting in motion two years of negotiations on Brexit.

Oil stabilising

It's been a bit gloomy for oil bulls in the last few days but there are some signs of stabilisation after the record reduction in net longs to the tune of 153 million barrels as unveiled by the COT report helped calm nerves in the market.

"The long/short ratio has come in from 10.3 on February 21 to 4.4 and that now leaves the focus on the API tonight and the EIA inventory report Wednesday," says Saxo Bank's head of commodities strategy, Ole Hansen.

Hansen also pointed towards the latest Opec intervention that it will look to extend the oil production cut deal beyond its current lifespan of six months as helping ease anxiety, but the commodities chief is not so convinced that this will last.

"Opec will have a mammoth task getting non-Opec participants in the deal on board and we are also likely to see more production out of Libya," he says. "We may be settling once again at the lower end of the range but the bias remains to the downside."

Brent crude was at $52.03/barrel at 0755 GMT. WTI was at $49.24/b.

Gold meanwhile stuttered at the $1,238/oz mark despite the general weakness pervading dollar but Hansen suggests that if the precious metal can get through that key barrier, then a run to $1,261/oz is on the cards.

Gold was at $1,228/oz at 0755 GMT.

Smell it

There was no such hesitancy in coffee, however, after weather-related supply issues in Vietnam helped the local brew storm to a five-year high and help the market establish a base just shy of $1.40/lb. 

"The net long on coffee is also at a 40-week low so once they get involved, this will also help boost the market some more," says Hansen.

Coffee boosted on the back of Vietnam's five-year high

Source: Bloomberg

And finally....

We started off by looking at the Trumpflation trade ahead of the key vote in the Senate Thursday and if US 10-year Treasuries are anything to go by, then the markets are getting increasingly nervous about the prospects for the trade.

"The chances of a US Federal Reserve hike in June have fallen to the 40% mark and we've also seen US 10-year Treasuries come down with 2.30% potentially on the horizon," says Michael Boye from Saxo Bank's fixed income desk in Copenhagen.

Food for thought for markets, Trump and indeed the globe ahead of the Thursday showdown.

We wish you a merry litmus, we wish you... Photo: Shutterstock

Martin O'Rourke is managing editor at Saxo Bank


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