Risk of trade war looms
US president Donald Trump has long advocated trade restrictions that would benefit US industry. His stance had remained a mere threat until this month, when he announced the US would impose import tariffs on steel and aluminium. However, we have already seen several countries exempted and more may follow. Trump's actions are largely symbolic, in our view, and not something that will significantly affect the US economy or global trade. Nevertheless, the risk remains that other countries will respond in kind and eventually provoke a global trade war. It is likely a trade war would be negative for the global economy and result in higher inflation. We also expect the current situation to generate more headwinds for the USD.
ECB takes another baby step towards normalisation
The ECB tweaked monetary policy a little further at the March policy meeting, when the central bank adjusted its forward guidance. The ECB is no longer mentioning the option of increasing bond buybacks should that be necessary. As this next baby step towards normalising monetary policy was broadly expected, it prompted little movement in the FX or fixed income markets; nor does the outcome of the meeting change our view that the ECB is not likely to hike interest rates until Q2 19.
Rising USD yields not only due to the Fed
USD yields have risen markedly since the end of 2017, for a number of reasons. (1) The market expects further rate hikes from the Federal Reserve in 2018 and 2019. (2) After passing the budget and agreeing to raise the debt ceiling, the US Treasury has been pumping out government securities, particularly T-bills, which has helped lift short yields. (3) The gradual reduction in the Fed's balance sheet is tightening liquidity in the USD money market and putting upside pressure on short dollar yields. (4) Repatriation of overseas earnings in connection with Trump's tax reform is reducing the demand for short USD securities in, for example, Europe and putting upside pressure on USD yields. Common to all these factors, which do not necessarily constitute an exhaustive list, is that they are enduring, which means the upside pressure on USD yields in recent months is not likely to ease anytime soon.
Stable oil prices
The oil price has remained stable at around USD65/bl for the past few weeks and the factors influencing the price of oil recently have also generally been experiencing a period of calm. Oil rig numbers in the US have stopped rising and the USD has remained more or less stable, while there has been no real news on the geopolitical front or in relation to OPEC announcements on the future strategy of the cartel. Moreover, the global macroeconomic situation still looks healthy.
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