German Coalition Talks Collapse

Daily Analysis - 20/11/2017

Euro Sustains Reversal From Prior Week’s High

German Chancellor Angela Merkel’s efforts to cobble a three-way coalition government broke down overnight, escalating political uncertainty in the Euro Area's largest economy almost two months after its general election concluded. Investors were jittery following the news, sending the Euro -0.50% lower against the US dollar in Monday Asian trade.

Germany Staring at a Minority Government

Angela Merkel's conservative alliance secured the largest proportion of votes in the September polls but finished with its worst result since 1949, forcing the long-serving German leader to try to stitch a coalition majority together. Those efforts hit a major roadblock after the chairman of the pro-business Free Democratic Party withdrew from negotiations late Sunday. The latest development left Germany with two unprecedented options – either Merkel forms a minority government, or else the President will call for a fresh election.

The likelihood of prolonged uncertainty in Germany is worrying investors considering Merkel has long been viewed as Europe's pre-eminent leader, having steered Germany through both the 2008 financial crisis and the subsequent Greek debt crisis. The Euro slumped broadly in early Monday trade, with EURUSD pulling further away from a one-month high of 1.1860 reached on Wednesday.

Post-Hurricane Rebuilding Drives US Housing Starts

The pace of home construction in the United States surged to a one-year high in October as communities affected by the recent hurricanes in the South started replacing houses damaged by flooding. Seasonally adjusted, housing starts jumped 13.70% to an annual rate of 1.29 million units, marking was the highest reading since October of 2016 while easily topping the 1.18 million units pace forecast by economists. Ground-breaking in the southern states, which contributes to almost half of US residential construction activity, plunged in the aftermath of Hurricanes Harvey and Irma that ripped through Texas and Florida.

The increase in October’s housing starts reverses three-straight months of declines, and should ease concerns about the sector after proving a drag on growth since the second quarter. S&P 500 futures finished lower on Friday as worries about the actual implementation of US tax reform lingered on Wall Street.

Japan’s Exports Grow by Double Digits for a Fourth Month

Growth in Japanese outbound shipments held steady in October, signalling that brisk global demand for cars and electronics manufactured in the country will likely support economic recovery during the current quarter. Data from the Ministry of Finance released early Monday showed exports climbing 14.00% year-on-year last month, following a 14.10% gain in September compared to analyst estimates anticipating a 15.80% increase.

Imports rose 18.90% on year to October versus the median estimate for a 20.20% increase. The heightened outbound shipments resulted in a narrow surplus, with the favourable balance slipping to JPY 285.40 billion ($2.54 billion) from the JPY 667.70 billion surplus reported in September. Notably, China overtook the United States during the month as the top destination for Japan's exports in October, with outbound shipments to Asia's largest economy soaring 26.00% to JPY 1.35 trillion ($12.00 billion). USDJPY is down early following the overnight reopening, falling beneath key support at 112.000.

Canadian Inflation Pulls Away from Central Bank Target

Lower energy prices saw Canada’s annualized pace of inflation drop in October, bolstering the case for policymakers to wait until next year to lift interest rates again. Per Statistics Canada, consumer prices gained 1.40% through the year ended last month, down from the 1.60% rate reported in September, matching market expectations. The Bank of Canada has three favoured measures of core inflation – common, median and trim. Of these, only one recorded a modest uptick in October.

The latest figures come after the Bank of Canada kept interest rates steady last month following two hikes this year. In a statement accompanying the decision, officials said inflation is unlikely to hit the bank’s 2.00% target until the second half of 2018 amid the recent rise in the Canadian dollar, which has kept consumer price pressures in check. USDCAD is off the highs of Monday trade to currently hover around 1.2770.