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An increasingly provocative North Korea is testing the limit of US' patience. Following another test of ICBM missile last Thursday, US President Donald Trump has accelerated sanctions against the hermit Kingdom. He has also pledged to give China a difficult time on trade amidst the latter's lack of pressure against North Korea's nuclear developments. Although intensifying geopolitical tensions might increase volatility of the financial markets, we believe the chance of war remains remote as the provocations-sanctions-negotiations process is indeed a routine of the Korean Peninsula problem over the past decades.

With 98% of the vote declared, PM Theresa May's Conservative Party would remain the biggest party with over 300 seats in the Parliament. However, Tories would highly likely fall short of majority. The disastrous scenario in our previous report materializes: A hung parliament is now inevitable. Yet, unlike the situation in 2010, Tories would find it very challenging to form a coalition government with other parties. The snap election not only has resulted a reduction in number of seats for Tories, but also has scrapped their majority status in the Parliament. This would only make the Brexit negotiation with the EU more difficult, even if Tories managed to form a coalition government.

Geopolitical uncertainty in the Middle East lifted Australian dollar. A boycott over Qatar is expected to disrupt the country's exports, benefitting its rival, Australia, over LNG exports. Aussie, however, retreated on 'Tuesday, using RBA announcement as an excuse. The central bank reiterated that the global economy continued the "broad-based pick-up", suggested that the domestic economic transition from mining investment has "almost complete" and maintained a neutral tone on the monetary policy. Yet, it remained concerned that low household income growth would constrain consumption. We are skeptical over RBA's forecast that Australia's economy growth would reach+3% p.a. and cast doubt over how long it can refrain from cutting the policy rate further so as to prevent the property bubble.

British pound volatility has recently increased, not only because the general election is approaching, but also because some opinion polls suggest a hung parliament. The latest YouGov/ Time voting intention survey shows that support for the Conservatives declined markedly to 42% while the Labours gained +3 points to 39%. The 3-point lead by the Conservatives is the narrowest since PM Theresa May has called for the snap election in April. The Liberal Democrats hovered around single-digit, the UKIP remained on 4% and votes for other parties are at 8% (from 7%). Converting percentages to numbers, PM May's Conservative Party, while remaining the biggest party, might lose as much as 20 seats, down from 330 to 310, in the upcoming general election. If the election outcome results in a hung parliament, it would be the second time since 1974, and the seventh time since the beginning of the 20th century.

Political uncertainty re-emerged in Europe shortly after the being improved on French presidential election. Now, it is Italy's turn with a snap election later this year becoming increasingly likely. With major parties converging to a deal on a new electoral law, an early election might take place in coming months, probably synchronizing that of German's in September. The euro reacted negatively and declined to the lowest level in more than a week before rebound. The 10-year Italian-German yield spread soared to almost the highest level in a month on concerns that the rapidly-rising Five Star Movement, the populist, euro-skeptic political party, could eventually become part of the coalition in Italy and destablize European Union again.

USD's slump accelerated as increasing political uncertainty, accompanying disappointing inflation data, has intensified concerns over the country's growth outlook. Four consecutive days of selloff, accumulating loss of over -2%, has sent the DXY index to a 6-month low of 97.33 before recovery. Leading the rally against US dollar was the euro. With removal of one political risk after the French election, the market has turned its attention to the region's economy of which the development have been encouraging. Rebound in inflation and positive sentiment indices have raised speculations that the ECB would add some hawkish twists in its forward guidance. EURUSD has rallied as much as +2.7% over the past 4 trading days. The sustainability of the single currency's strength depends on the tone of ECB and FOMC meeting statements in June.

Centrist independent Emmanuel Macron has won the French presidential election in a decisive victory. With virtually all votes counted, Macron has taken 66% of votes in the second round runoff, compared with far-right populist Marine Le Pen's 34%. While the election outcome had been suggested in the pre-election opinion polls, financial markets still reacted positively as defeat of Le Pen signaled a diminished risk of Frexit, a real concern haunting politicians and investors across the globe after the surprising Brexit referendum and Donald Trump's victory in US presidency. Despite her loss, it is the highest number of votes that far-right parties have ever received in modern French history. As she noted in the concession speech, she was 'designated the leading opposition force in this second round', Turnout of this election was 65.4%, 6.6 percentage points lower than that in the 2012 runoff and the lowest since the second round of the 1981 election. The total number of abstentions and spoiled votes, at 12 million, was greater than 10.7 million received by Le Pen, underpinning the general public's discontent over the current political and economic environment in France.

We view the recent decline in Australian dollar as a catch-up of the selloff of the iron ore price from its February peak. Spot price for 62% benchmark iron ore slumped more than 30% in 2 months after reading a peak of US$90/tones on February 21. During the period, AUDUSD had been trading within a broad range and dropped around -2%. The relatively resilience in Aussie was likely driven by the broad-based weakness in the greenback as soft dataflow had diminished expectations of a rate June rate hike. Recall the selloff of iron ore prices accelerated in March, after China's pledge reduce steel capacity. The tighter liquidity conditions in China's money markets have reinforced concerns over the government's efforts to crack down the steel industry.

USDCAD consolidated after a brief break about 1.36, following US' announcement to impose anti-subsidy tariff on softwood lumber imports from Canada. US Commerce Secretary Wilbur Ross indicated that the "countervailing duties" would range from 3-24% and would be imposed on 5 Canadian lumber exporters including West Fraser Timber Co., after concluding that Canada subsidizes its industry in a way that hurts the US. Ross added that the move is a sign to other trading partners that the US is planning stricter enforcement of trade laws. Canada responded by saying that the tariff is "unfair and punitive".

With 97% of the vote counted, Emmanuel Macron and Marine Le Pen would enter the second and final round of the French election, scheduled on May 7. The election result of the first round came in largely as projected in opinion polls. Yet, the market was thrilled with the euro soaring to the highest level in 5 months, rallying as much as +2% at one point. Indeed, the strength in the single currency was broadly based. EURJPY jumped more than +3% before retreat while both EURGBP and EURCHF have risen over +1%.DJIA futures also soared, reflecting improving sentiment. The market was relieved as Macron is believed to have higher chance to win eventually and thus a Frexit referendum could be avoided. Besides, the market reaction also reflected how tight the race was. The market refrained from relying on opinion polls as the supports for major candidates were close and the percentage of undecided voters was high. Meanwhile, the predictive power of opinion polls has be doubtful after the surprising results of Brexit referendum and US presidential election

Are world leaders nowadays keen on breaking their own promises? Just days after Donald Trump's reversal of campaign pledge to label China as "currency manipulator", UK PM Theresa May announced that she would seek MPs' support for an early general election to be held on June 8. The news came in less than a month after her affirmation that "the next election will be in 2020". GBPUSD erased earlier losses and jumped to a 4.5-month high of 1.2755 after the announcement, on expectations that a landslide victory of the Conservative Party would strengthen May's mandate in the 2-year Brexit negotiations.

With less than a week to go, concerns over two euro-sceptic candidates, far-right Marine Le Pen and far-left Jean-Luc Melenchon entering the run-off have clearly escalated. Support for Melenchon has surged since the second debate held earlier this month. We believe such scenario is still having a low chance based on analysis on trends in polls. And, our base case remains unchanged that centrist Emmanuel Macron and Le Pen will enter the second round. However, following Brexit referendum and US president Donald Trump's victory, there has been increasing doubts over the predictivity of opinion polls.

The most imminent political event in the Eurozone is the French presidential election, with the first round taking place on April 23 and the second and final round on May 7. Polls have suggested that centre-left candidate Emmanuel Macron and populist far-right candidate Marine Le Pen would get the most votes in the first round, but then Macron would win the second and final round, and become the next French president.

Trump administration's failure to repeal and replace Obamacare has hurt market sentiment, triggering concerns over the feasibility of the president's pro-growth policy agenda. In the FX market, US dollar fell across the board amidst concerns that reflation trades since Trump's victory is over. The DXY index dived to a 4-month low of 98.86 on Monday before recovery. USDJPY also plunged to 110.09, lowest since November 18, 2016, before stabilizing. As we mentioned in the January report, it would not be surprising to see USDJPY correct to 110-112 in 1Q17. Therefore, the current price movement has not yet derailed our forecast although Trump's implementation ability has surprised to the downside. While it cannot be ruled out that the currency pair might break below 110 briefly, we retain the forecast that USDJPY should recover to 115 and then to 117 later this year.

Political uncertainty, in particular the French Presidential election, in the Eurozone has unnerved European bond markets. Although far right candidate Marine Le Pen is expected to lose in the second round of the election, the market still finds this tail risk non-negligible. Indeed, recent movements of French bond yields, as well as French-German yield spreads, have been dominated by opinion polls. French yields, as well as French-German yield spreads, climb higher as Le Pen's supports gain, vice versa. For instance, we notice that France's 10-year bond yield has started falling since February 22, after veteran centrist Francois Bayrou surprisingly joined Emmanuel Macron in his campaign. Yields continued to drop, falling to a one-month low of 0.92% today, as the latest polls signaled that Macron would beat Le Pen in the second round of presidential elections in May. Simultaneously, French-German yield spreads fell to around 0.72%, the lowest level in a week.

SNB's sight deposits added +3.81B franc, or +0.71%, to 539B franc, in the week ended February 8. This marks the biggest increase since November when the central bank intervened in the aftermath of Donald Trump's victory. The move this time was, again, to curb the strength of the franc with EURUSD breaking below the support level of 1.0676/84 in late January. There are several reasons that have triggered the recent EURCHF selloff: intensifying political risks associated with upcoming elections in the Eurozone, rising of Swiss bonds yields alongside German ones, and concerns over US' accusation of currency manipulation. We retain our forecast that EURCHF would weaken further. While SNB's intervention would continue, the central bank is likely more tolerable over modest franc appreciation given better domestic economic developments

USDJPY's rally since early February indicates that the correction from the 2016-peak (118.66) made on December 15 is ended at 111.57 on February 7. We remain bullish over the currency pair (i.e. expecting Japanese yen to weaken against US dollar). As we mentioned in our January report, reflation trade, driven by US President Donald Trump's pro-growth policy, such as infrastructural spending, tax cut and deregulations, has driven USD's rally against major currencies since Trump's victory. Hopes that the measures would drive US growth and inflation have lifted speculations on Fed funds rate hikes this year, sending Treasury yields and USD higher. Meanwhile, BOJ's yield curve targeting policy, announced in September last year, would keep the 10-year JGB yields close to 0%. These would help accelerate divergence of Japanese yields from those in the US, pressuring Japanese yen. Recent developments appear to have reinforced such conviction.

Chinese GDP expanded +6.7% in 2016, grabbing the mid-point of government's target of 6.5-7%. Growth is expected to decelerate further, probably reaching +6.5% this year. At the Central Economic Work Conference held last December, top leaders of the Chinese Communist Party indicated the policy would focus on controlling credit and housing risks, compared with stimulating growth in the past year. Yet, growth is still an issue concerning the government, with achieving growth targets a critical factor to ensure smooth leadership transition in late 2017. Meanwhile, renminbi should depreciate further. Besides the broadly-based strength in US dollar, concerns over further renminbi depreciation would continue to lead to huge capital outflow, a behavior that aggravate renminbi's weakness. We expect USDCNY to rise above 7 in 2Q17.

We expect EURCHF to weaken modestly from current level. Elevated political uncertainty in Europe should maintain demand for Swiss franc as a safe haven, a status which accelerating buying of the franc in several occasions in 2016, including Brexit referendum and US presidential election. While FX intervention is still on, we expected SNB to be a little more tolerable to franc's appreciation than the previous years. Switzerland's economic outlook has improved over the past months with gradual recovery seen in exports and inflation. Meanwhile, strength in US dollar should also allow the franc to weather some appreciation against the euro. In our estimate, EURCHF might drop to 1.05 by end-2014, -2.8% below SNB's unofficial floor of 1.08, after the central bank's removal of the 1.2 threshold in January 2015

Recent correction does not change our relatively positive outlook over USDJPY this year. Donald Trump's victory at the US presidential election last November triggered sharp rally in interest rates and USD, facilitated by unwinding of USD shorts and opening of USD longs. Despite a pullback after soaring to a recent high 118.66 in mid-December, reflation trades, hinging on the bets that Trump's administration would drive quicker growth and inflation, remain in play and should push USDJPY higher after consolidation. Yield curve targeting announced in September indicates that BOJ would strive to keep the 10-year JGB yields close to its target by buying sufficient amounts of bonds. This, together with the sharp rise in US yields, helps accelerate divergence of Japanese yields from those in the US, pressuring Japanese yen. We do not feel surprised if prices corrects to 110-112 in 1Q17. Rather, it offers a buying opportunity for a resumption of recent rally. Risk to USDJPY's strength is slower-than-expected and/or milder-than-expected implementation of Trump's pro-growth policy.