Headlines concerning French presidential candidates led to volatility in European rates over the week. The spread between the yield on French bonds and German bunds spiked to levels not seen since 2012. We currently have no position in French rates but are alert to relative value opportunities arising from interest rate volatility in European markets amid political events.
Central banks in the US, UK, New Zealand and Australia kept policy unchanged over the week. We continue to expect the US Federal Reserve (Fed) to raise interest rates at least three times this year but see reduced impetus for a rate hike in March. We are underweight US rates and overweight the US dollar.
We are more constructive on emerging market currencies due to improvements in global growth, relatively subdued market volatility and a potentially less radical stance on protectionist trade policy in the US. We are overweight the Chinese yuan, Mexican peso and Brazilian real.
US President Donald Trump has issued a string of executive orders, including ones which withdraw the US from the Trans-Pacific Partnership (TPP), suspend refugee resettlement and restrict individuals from seven nations from entering the United States. A more protectionist stance on trade is likely to add to inflationary pressures arising from a tightening labor market and potential fiscal stimulus. We are positioned for steepening in the US yield curve.