Euro opens the week broadly lower as the Catalonian referendum for independence on Sunday turned into chaos. Legally recognized or not, preliminary results show that 90% votes were in favor of independence with a turnout rate of 42.3% (2.3M votes). What shocked the world is that the the peaceful campaign had met with violent suppression of the Spanish government, with brutal attack by the national police (firing rubber bullets, seizing ballot boxes from polling stations, etc). It's believed the violence of the government provoked more "yes" vote for independence.
There were some conflicting movements in the markets last week. Risk appetite was clearly strong in US and Europe. S&P 500 and NASDAQ ended at record highs and DOW was not far from it. Dollar was firm as investors finally got some more details about the long awaited tax reform. Treasury yield also jumped as markets were getting more confident on the bet of December Fed hike. However, the greenback was overshadowed by Swiss Franc, which ended as the strongest one for the week. Dollar was only the second best performer. Yen also ended the third strongest ones. The decoupling of risk sentiments with Swiss Franc and Yen could be partly seen as the results of quarter end position squaring. Or, it's a sign that Dollar strength was indecisive due to lack of confidence over the tax plan.
Dollar weakens pare gains as markets are heading to weekly close. In particular, Swiss Franc has overtaken Dollar's place as the strongest one for the week. Economic data from US are providing little boost for the greenback. Instead, tamer than expected inflation is weighing mildly on Dollar. And traders should be taking profit at quarter end, and ahead of next week's employment data. Meanwhile, some more time is needed to reassess the impact of US President Donald Trump's tax plan, before traders take a more decisive stance. US personal income rose 0.2% in August, spending rose 0.1%, in line with consensus. Headline PCE was unchanged at 1.4% yoy while core CPI slowed to 1.3% yoy. Both were below expectations. From Canada, GDP rose 0.0% in July, below expectation of 0.1% mom. IPPI rose 0.3% while RMPI rose 1.0% mom in August.
Dollar is losing some momentum but it's still likely to end the week as the strongest one. The initial reactions for US President Donald Trump's tax plan were positive. But markets quickly turned into cautious mode as they reassess the situation. DOW gained 0.18% to 22381.20 overnight, but stayed below 22419.51 record high made last week. S&P 500 ended at new record at 2510.06 by was kept below Thursday's high as 2511.75. 10 Year yield opened sharply higher and jumped to as high as 2.344, but pared back all gains to close flat at 2.309. In the currency markets, commodity currencies are set to end as the weakest ones. Euro, Yen and Sterling could end the week mixed.
Dollar is paring some gains today but it remains the strongest major currency for the week so far. While bond yields remains firm today, the greenback is losing some momentum. Euro and Sterling are trading firmer while commodity currencies remain weak. Released from US, initial jobless claims rose 12k to 272k in the week ended September 23, above expectation of 269k. Continuing claims dropped -45k to 1.93m in the week ended September 16. Trade deficit narrowed to USD -62.9b in August. Wholesale inventories rose 1.0% in August. Q2 GDP was revised up to 3.1% with price index unchanged at 1.0%.
The financial markets responded quite positively to US President Donald Trump's tax plan in spite of some criticisms. Most notable movements are seen in treasury yields. 10 year yield closed up 0.080 at 2.309, resuming recent rise from 2.034 and is on course to 2.396 resistance. 30 year yield also resumed recent rally and ended up 0.093 at 2.863. Stocks also strengthened with S&P 500 hitting new intraday high at 2511.75 before closing at 2507.04, up 0.41%. DOW gained 0.25% to close at 22340.71. Fed fund futures are pricing in 83% chance of December hike, up from 73% a week ago. Dollar extended this week's advance, in particular, it's picking up momentum against commodity currencies.
As widely anticipated, RBNZ left the OCR unchanged at 1.75% in September Policymakers downgraded the domestic growth outlook and suggested that the accommodative monetary policy would stay for a “considerable period'. Thanks to the recent decline in New Zealand, driven by heightened political uncertainty, RBNZ tweaked its warning over currency strength. It noted that a lower exchange rate would "would help" raise tradables inflation. We expect RBNZ to keep the policy rate unchanged for the rest of the year, and likely through 2018.
Dollar's rally extends in early US session after solid economic data. Headline durable goods orders rose 1.7% in August, versus consensus of 1.0%. Ex-transport orders rose 0.2%, in line with expectation. Dollar traders are keenly looking forward to US President Donald Trump's announcement of tax reform (or just tax cuts?). It's reported that corporate tax rate would be brought down from 35% to 20% level. Top individual income tax rate will also brought down from 39.6% to 35%. Trump is scheduled to deliver a speech in Indianapolis later in the afternoon to promote his plan.
Dollar remains broadly firm today, unmoved by the cautious comments from Fed Chair Janet Yellen. Traders are eagerly awaiting the long-awaited tax reform from US President Donald Trump. Meanwhile, Euro and Kiwi continue to suffer post election weakness. It's reported that German Chancellor Angela Merkel have begun the coalition talk between CDU, CSU, GDP and Greens. But the common currency could stay pressured until the picture becomes clearer. And, it's consistent with the technical development that EUR/USD is in a medium term correction that would take some more time to complete.
Dollar trades broadly higher today as markets are awaiting Fed Chair Janet Yellen's speech on inflation, uncertainty and monetary policy at the National Association for Business and Economics in Cleveland. Yellen is likely to maintain the tone that Fed is on course for gradual stimulus removal. Her comments regarding slowdown in inflation will also be closely watched. With the job market maintaining solid growth momentum, inflation is the main obstacle to another hike by Fed this year. Comments from other Fed officials are mixed so far. For example, New York Fed President Dudley just reiterated his expectation for inflation to climb back to 2% target after "idiosyncractic" factors fade. But Chicago Fed President Charles Evans is a little bit concerned that the slowdown in inflation is structural.
While Euro is staying soft, after post German election selloff, it's still holding above near term support against Dollar and Yen. Weakness is mainly seen against Sterling as 0.8773 support is taken out. Also, the common currency has not yet shown any sign of a rebound. Meanwhile, Dollar is turning slightly softer against others while Yen is picking up some strength. Mixed comments from Fed officials provided little support the the greenback. While are still pricing in more than 70% chance of a December Fed hike, the decision will remain very much data dependent. Tensions between US and North Korea remain tight as verbal exchanges between leaders continued to escalate.
Euro dips notably today in reaction to the results of Germany elections. And, the common currency is trading as the second weakest one so far, just next to New Zealand Dollar. While Angela Merkel won her fourth term as Chancellor, there are big questions and what the coalition government would be. First runner up Social Democrats are very clearly and determined to be a "strong opposition" and the "grand coalition" is ruled out. Meanwhile, the prospect of the Jamaica coalition of CDU, business friendly FDP and Greens is seen by many as having intrinsic instability. The rise of antit-EU AfD might prompt some worries over EU reforms. But AfD has already in disarray as its chair Frauke Petry walked out at a press conference and declared she won't sit with the party in the Bundestag, showing huge internal dissent.
Despite the general perception that the German election would be a boring game, the outcomes contain several surprises and should drag the process of deeper EU integration. Angela Merkel's CDU and its sister party CSU have secured 246, out of 709 seats in the new Bundestag, marking a decline of -65 seats from the 2013 term. With CDU remaining the biggest party, Merkel will no doubt be the Chancellor for a fourth term. However, it is challenging for her to form a coalition government this time. Back in 2013, the CDU/CSU formed a Grand Coalition government, with SPD as its junior partner. This time, with SPD's number of seats sharply falling to 153 (down -40 seats from 2014), the party has pledged that it would head into opposition this time. Indeed, the SPD during the election period had been complaining about the loss of popularity after forming coalition with CDU/CSU. Yet, Merkel has asked Martin Schulz, SPD's leader, to re-think. The Grand Coalition is expected to be the best for the financial markets, providing the least uncertainty and most favorable for deeper EU integration.
While the final result would be formally announced on October 7 (due to the complex arithmetic of the mixed-member proportion system), the available information confirmed that the centre-right National Party remains the biggest party but would again be shy of being a majority government. Worse still, it would also be challenging for Nationals to form a minority government with consent of smaller parities. While many believe that the most likely result would be a Nationals+ NZ First coalition, it is not yet a done deal as it is still possible for NZ First form a coalition government with centre-left Labors and left-wing Greens. With plenty of uncertainties remains and the populist NZ First likely be a kingmaker in this term, New Zealand dollar got hit, losing over -1% against US dollar and Australian dollar.
Euro gaps lower against Dollar as another week starts. Markets seem to be dissatisfied with Germany election result even though Angela Merkel won her fourth term as Chancellor. Nonetheless, loss in the common currency is limited and it quickly recovers. Meanwhile, Kiwi also trades lower after indecisive election results. Yen is mildly weaker and risk sentiments are steady even though US President Donald Trump continued his verbal exchanges with North Korea officials. Yen traders' are probably more on Japan Prime Minister Shinzo Abe's press conference for snap election, rather than the words of the two sides that are on "suicide mission". Sterling is mildly firmer as the fourth round of Brexit negotiations starts.
There were a lot of happenings in the financial markets last week. The more hawkish than expected FOMC announce was supposed to give Dollar a strong boost. But it was the resilience of Euro that's much more convincing. New Zealand Dollar ended as the strongest one leading up to Saturday's election. Kiwi traders should be given a relief after the ruling National Party won the election, even though without outright majority. On the other hand, Canadian Dollar ended as the weakest as recent consolidation continued. Yen and Swiss Franc followed as the next weakest in an era of global monetary stimulus exit.
Yen trades broadly higher today on resurgence of geopolitical risks. North Korea threatens to launch hydrogen bomb in Pacific Ocean, in response to US President Donald Trump's "total destruction" provocation, and new sanctions. But overall, Yen is the weakest one for the week so far with risk appetite and global monetary stimulus exit in the background. This is also reflected in Swiss Franc, which is the second weakest for the week. On the other hand, Euro reversed the post FOMC selloff and is occupying the top spot among major currencies. The common currency is also getting support from solid data. Dollar is firm too but the uncertainty over the tension with North Korea is limiting its strength.
Yen recovers broadly today while Asian equities are trading generally lower as geopolitics is back haunting the markets. Tensions between North Korea and the US escalated again this week after US President Donald Trump's threat of "total destruction". This was followed by an executive order by Trump to forcefully push through trade embargo with North Korea. Then, North Korea responded by pledging to strike back with with countermeasures, including the use of hydrogen bomb. Dollar is mixed today as the boost from FOMC faded. Aussie and Kiwi are under much pressure. Aussie is still feeling heavy after China rate downgrade. Kiwi is cautious ahead of election in the weekend. On the other hand, Euro is staying firm ahead of Germany election on Sunday. Sterling is mixed a UK Prime Minister Theresa May's high profile Brexit speech is awaited.
Despite the comfortable lead of Chancellor Angela Merkel's Christian Democratic Union (CDU) and its sister party, the Christian Socialist Union (CSU), in polls, Germany, as well as the EU, would never be the same again after upcoming German election on September 24. Merkel is on the course to pursue her fourth, and the last term, as the Chancellor. Her party is unlikely to form a government without forming coalition other party(ies). While the Grand Coalition (CDU/CSU+SPD as the junior partner), just like the one we have had since 2013 and between 2005-2009, is the most favorable to the economy and the financial markets, it cannot be seen as a done deal.
Dollar is maintaining most of the post-FOMC gains against other major currencies. But it's turning softer against Euro and Sterling today. Better than expected job data provides no inspiration to the greenback. While developments in USD/CHF and USD/JPY are bullish, GBP/USD shows the Pound is still having an upper hand against Dollar. EUR/USD is staying well above 1.1822 support zone and maintaining near term bullishness too. Nonetheless, it's the selloff in Aussie and Kiwi that catches most eyes. RBA Governor Philip Lowe's comments suggest that he's in no hurry to follow other central banks in tightening. But the main driver is S&P's downgrade of China's sovereign credit rating.