Euro Slips on German Political Uncertainty

Daily Analysis - 25/09/2017

Surge in Far-Right Popularity Erodes Angela Merkel’s Grip

The Euro slipped against the Pound on Monday as German Chancellor Angela Merkel faces a fractured mandate despite an election victory as support for the far-right surged. The anti-immigration Alternative for Germany stunned most analysts by becoming the first far-right party to enter German parliament in over half a century.

German Election Outcome Could Trigger Flight to Safety

Although they won the most votes, Merkel’s centre-right Christian Democratic Union will have to stitch together an uneasy coalition to form a government. Investors reacted by selling the Euro on apprehensions that Merkel could run into difficulties forging a coalition.

The result marked a partial affirmation of Merkel’s emphasis on Germany’s economic stability and prosperity at a time of political upheaval elsewhere around the globe. However, the groundswell of support for AfD upended any notion that Europe’s most important geopolitical player is immune to the populist sentiment roiling other western democracies. It also revealed the extent of resentment toward Merkel’s 2015 decision to open the country’s borders to more than a million asylum seekers amidst the European refugee crisis. The EURGBP pair is sliding early Monday to last trade around the 0.8790-zone.

Japanese Manufacturing Reaches 4-Month High as Output Accelerates

Manufacturing activity in Japan expanded at the fastest pace in four months during September as both domestic and export orders picked up according to a leading private survey released overnight. On a seasonally adjusted basis, the Nikkei Japan Manufacturing PMI rose to a preliminary 52.6 in September from a final 52.2 in August. The index has remained above the 50-mark that separates expansion from contraction for 13-straight months.

The flash index for new export orders climbed to 53.1 from 51.3 in August while the index for new orders rose to a preliminary 52.5 in September. The better than expected PMI survey follows government data last week that showed Japanese exports expanded by the most in nearly four years through the end of August amid strengthening overseas demand. In the meantime, USDJPY is off the session highs to currently hover around 112.200.

Canadian Inflation Accelerates as Retail Sales Top Consensus

Headline consumer prices in Canada rose by the most in four months during August, giving policymakers further room to consider lifting the key lending rate again before the end of the year. Data compiled by Statistics Canada showed that on a yearly basis consumer prices edged 1.40% higher last month, up from 1.20% recorded in July.

The Bank of Canada has hiked interest rates twice since July, with investors projecting as many as three more increases by the end of next year amid speculation that the Central Bank will act decisively to curb any inflation pressures. Separate data from Statistics Canada showed that retail sales in the country surged more than forecast in July as consumers increased their spending on new cars. The 0.40% gain easily topped economists’ expectations for a rise of 0.10%. USDCAD is flat on the session, with the pair last seen ebbing near 1.2330.

Fitch Upgrades Russia’s Rating

Citing steady progress towards strengthening the existing policy framework, Fitch revised Russia’s outlook from “stable” to “positive”. The ratings agency preserved the country’s rating at “BBB-,” noting the improvements in the policy framework were underpinned by strong commitment to the inflation target, more flexible exchange rate targeting, and prudent fiscal strategy.

The Russian economy suffered amid the protracted slide in crude oil prices and economic sanctions that saw it tumble into a 2-year recession. However, growth has steadily picked up, with GDP expanding at a 2.50% pace during the second quarter- the quickest in almost five years. S&P’s Global Ratings had last week affirmed Russia’s long-term and short-term foreign currency rating at “BB+/B” with a positive outlook. The USDRUB pair remains in an immediate-term downward trend, with the pair last trading around 57.6200.