EUR/USD - healthcare and political risk - Rabobank

Rabobank Financial Markets Research team suggests that today’s vote in Congress on the Republican’s health-care overhaul is being viewed by the market as a test of Trump’s whole reflationary programme. 

Full report

"While conservative Republicans have a desire to remove “essential health benefits” from the Obamacare programme to reduce the overall cost, moderate party members are concerned about loss of cover and increased price of premiums.  Not allowing for recent revisions, the Congressional Budget Office has warned that 14 mln fewer people would have insurance by 2018 under the GOP healthcare plan and that poorer and older Americans would be disproportionately affected by the proposals.  Many of these are likely to have voted for Trump in the November election.   Last week a Rasmussen opinion poll found that 52% of likely US voters are concerned that changes to the Obamacare may go too far.  The latest Rasmussen daily poll suggests that 54% disapprove of Trump’s performance and give him a Presidential approval rating of -14.  March has brought a considerable decline in these ratings.  The ageing population and the associated strain on the government’s budget deficit play a central role in the difficulties issues surrounding the health care negotiations." 

"Despite the complexities of the US healthcare offering, the markets are viewing today’s vote in a binary manner. A success for the plan in today’s vote will be seen as signalling that Trump could muster the support for a fairly aggressive programme of infrastructure spending and regulation cuts.  By contrast, any delay today will be read as a signal that air is seeping out of reflationary hopes." 

"Last week Fed Chair Yellen recognised the difficulties in pre-empting fiscal policy changes. Following the March FOMC meeting she stated that “we recognise that there is great uncertainty about the timing, the size, the character of policy changes, that may be put in place” and emphasised that the committee had not pre-empted future fiscal policy moves.  In contrast the markets have anticipated a boost to US growth potential from the Trump presidency.  The correction in US stock markets this week mark a small pullback in a bull rally that has dominated equities since the November election.  That said, the USD index has been wobbling since the start of the year." 

"In the weeks after the Trump election victory, the market extended its long USD positions on hopes of reflation. Simultaneously, concern over this year’s European elections resulted in a build-up of EUR shorts.  Since the start of the year, however, concerns that fiscal stimulus in the US could be delayed or diluted have contributed to a reduction of long USD positions.  Concerns over the economic impact of protectionist policies have also been having an impact.  Simultaneously, concerns of increased fragmentation in the EU have been soothed by the results of the Dutch general election and by opinion polls which consistently suggest that the far-right candidate Le-Pen is unlikely to win the French Presidency after the May election. The result has been an upward shift in EUR/USD which we expect can extend to 1.10 by the end of the year.  Crucial to this view is the assumption that Le Pen will fail in her election attempts.  We are also of the view that disappointment will be associated with Trump’s reflationary programme in the months ahead and see scope that additional fiscal stimulus could be delayed to the end of this year, or potentially pushed into 2018.  That said, a vote in favour of healthcare reforms today is likely to send EUR/USD lower.  This week’s low around EUR/USD1.720 is likely to provide some support.  On the upside this year’s high near 1.0830 is likely to provide resistance."