Know The Political Risk Framework

Know The Political Risk Framework

What political headlines matter and which ones don’t? That’s the question we look at today. The New Zealand dollar was the top performer while the yen lagged on Tuesday but after the RBNZ added guidance to its statement, the kiwi plunged.

Perhaps we were premature to expect that political risks would fade in the months ahead. Or maybe not, for all the hand-wringing about the Comey firing, markets didn’t show any sign of caring. Theoretically, it could derail or delay the legislative agenda but Trump could also appoint someone new who buries the investigation and lets him move on.

Trump doesn’t matter to markets as as he does to newspapers. Let’s backup and look at the framework since election night. Markets rallied not because Trump became president, but due to Republicans’ win in all three branches on an agenda of stimulus and tax cuts.

So what are the risks? Assume the longshot scenario of a Trump impeachment. Even then, Pence as president and Republicans would have control. So the real risk is disarray and disorganization within the Republican party. That’s a genuine risk and is the factor to watch rather than troubles at the White House.

In the meantime, it was another light data day with more hawkish Fed talk. That led to another steady US dollar bid in North American trade – especially in USD/JPY. Also note that a Treasury auction was soft for the second day and that boosted the dollar late in the day. A long-bond sale is scheduled for Thursday.

In Asia-Pacific trading, the New Zealand dollar was hammered more than a cent lower. The RBNZ held rates unchanged as expected but said policy will remain accommodative for a considerable period. They said inflation was expected to moderate further and the fall in the kiwi since February was welcome. NZD/USD plunged through stops to the lowest since last June on the headlines.