FX market outlookPosted on Monday, September 25 2017 at 8:41 am GMT+0000
Euro, kiwi setback as election winners seek coalition; gold down despite another round of threats
The euro and the kiwi were trading lower on Monday after the election weekend for Germany and New Zealand ended with expected outcomes but insufficient votes to form a government. Meanwhile, geopolitical tensions continued to escalate between the US and North Korea as another round of threats took place during the weekend. However, the markets ignored the fresh warnings, with the safe-haven gold retreating near to one-month lows.
On Sunday, exit polls in Germany favored Chancellor Angela Merkel for the fourth time with the winning center-right party CDU/CSU earning 33% of the votes compared to 20.5% attracted by the center-left SDP party. This was the worst result for Merkel’s party as it was the lowest seen since 1949, while her current SDP coalition partner said they would go into opposition after their percentage of votes fell back to post-war levels. On the other hand, the far-right party ADF won 12%, gaining enough seats to enter the parliament after more than half a century. Now, rumors suggest that Merkel is likely to discuss with the FDP and the Greens (Jamaica coalition) to build a coalition.
In New Zealand, general elections held on Saturday showed a victory for the ruling National Party and the current Prime Minister Bill English, with the party winning 46% of the votes compared to 35.8% gained by the opposition Labour party. Despite leading the elections, the next leader is still unknown as the votes earned were not enough to form a government. Therefore, during the next few days, the National Party will start discussions with smaller parties to secure a majority and form a coalition government.
The euro tumbled by almost 0.50% to $1.1896 before it rebounded to $1.1913. The kiwi also lost ground against the dollar, dropping by 0.90% to $0.7269 but managed to climb to $0.7281 afterwards.
Japan is also said to head to polls next month after the Japanese Prime Minister, Shinzo Abe, called for snap elections last week to take advantage of his improved ratings. According to the Nikkei Business daily survey, 44% of the voters support Abe’s LDP party, while 8% prefer the opposition Democratic party. Besides that, Abe stated on Monday that he plans to deliver a stimulus package of $17.8bn by the end of the year.
The yen pulled back during early Asian session trading following the disappointing preliminary manufacturing PMI readings out of Japan for the month of September. However, it pared losses afterwards, with dollar/yen falling from 112.52 earlier to 112.28 before the Asian markets close.
Geopolitical tensions did not ease during the weekend as the US president, Donald Trump and North Korea’s foreign minister, Ri Yong Ho, exchanged threats after US airforce bombers flew over international airspace east of North Korea. At his speech before the UN General Assembly, Ri Yong Ho said on Saturday that targeting the U.S. mainland with its rockets was inevitable after “Mr. Evil President” Trump called Pyongyang’s leader a “rocket man” on a suicide mission”. A few hours later, Tump tweeted on social media, that if the Noth Korean foreign minister repeats Kim’s thoughts, “they won’t be around much longer”.
Despite this, gold was down by 0.41% on the day at $1,291.11 per ounce, as investors ignored the renewed war of words and preferred to look for riskier assets. The dollar index jumped by 0.20% 92.11.
The pound bounced up by 0.40% to $1.3534 following a deep fall on Friday, when fears rose over expectations that May will announce the country’s exit from the EU earlier than the determined date following her highly anticipated Brexit speech. Moreover, after May’s speech, Moody’s downgraded Britain’s credit rating from Aa1 to Aa2 with the justification that the
Regarding energy markets, WTI crude was trading lower by 0.28% at $50.52 and Brent was down by 0.11% at $56.80 per ounce.
Next up, currencies are expected to fluctuate on speeches made by ECB and Fed policymakers who are likely to give further clues on monetary policy.