Euro falls on German coalition distress
The markets are busy digesting headlines from German Press that the German Free Democratic Party is said to be breaking off coalition talks with Merkel. Chancellor Angela Merkel has been trying to model a coalition between her Christian Democratic Union (CDU), the Christian Social Union (CSU), the pro-business FDP and the Green party following federal elections at the end of September.
It’s undoubtedly a blow for Merkel but highlights the vast difference of interparty opinions surrounding migration and energy policies.The announcement spooked high strung currency traders who are already on edge from the abundance of political headline noise in the US.
The euro toppled some 50 pips before finding traction while the USDJPY showed tentative signs of getting into the swing of things as dealers contemplate hedging against a possible EU equity market wobble.
Keep in mind, liquidity is exceptionally thin and could exaggerate moves. But this knee-jerk reaction does look a bit overdone as Merkel can still establish a minority government with either the FDP or Green Party.
Given traders have been positioning long euro for a shift in ECB policy on the back of robust EU data, the euro has remained well supported on the dip so far.
Broader Market Narrative
While the market remains focused on US tax reform, news that special prosecutor Mueller had subpoenaed documents from more than a dozen Trump campaign officials several weeks ago didn’t go unnoticed. So given the market’s preoccupation with political headlines traders virtually ignored the robust US economic data.
In a market starved for direction, with traders continually falling prey to price action bringing a high level of bewilderment to most trading desks. Amid limited Thanksgiving week liquidity conditions, and zero chance of any additional Tax Reform transparency from the Senate ahead of the holiday, the market will continue to roil on political uncertainty.
The US dollar is trading with a negative bias against the euro, sterling, and yen, but is firmer against the Antipodean currencies. And with little news expected on the Tax reform front early in the week, this current muddled USD trend should continue. However, the markets will remain prone to positioning driven RISK eruptions in price action even more so given what is little more than holiday thinned-trading conditions in early APAC trade.
For the market puritans, the yield curve is the primary focus which continues to flatten as traders buy long and sell short-dated yields speculating that the that the Federal Reserve would raise rates more aggressively Even with absentee inflation, investors are buying into the Full employment strong US economy narrative will ultimately force the Feds hand.
The Australian Dollar
AUD remains one of the weakest links in G-10 and conviction continues to fall by the week. Very tepid economic data last week highlighted by a miss on wage growth expectation.Weak data on the back of an overtly dovish RBA policy statement is just too hard to ignore Traders do not tend to be particularly good at bottom fishing nor have any suggestions for safely catching a falling knife
While the market focus shifts to this week’s speech by RBA Governor Lowe and RBA Minutes, I suspect dealers will continue to look for opportunities to sell as the markets subtly shift back into RBA rate cut mode again.
The Japanese Yen
USDJPY remains caught between a favourable medium-term outlook and a market looking to sell on anything resembling a risk-off move. Again liquidity is paper thin this week so tread lightly.