Market Review – Fundamental Perspective 25 September 2017

Angela Merkel won her fourth term as German Chancellor but both Merkel’s CDU and the SPD got their fewest votes in decades. With the SPD ruling out a coalition, the most likely outcome will be a CDU/Greens/FDP government (Jamaica), although negotiations will take time
The AFD did better than expected highlighting that the global decline in mainstream politics has reached Germany.
EUR opened marginally lower with EURUSD dipping below 1.1900 before retracing
Prime Minister May’s Brexit speech in Florence underwhelmed markets with its lack of detail. Some had hoped that that May would make concessions in her speech but the only important ‘new news’ was a formal acknowledgement of the need for a two-year transition period (as previously proposed by Chancellor Hammond).
Further pressure on GBP originated from Moody’s downgrade of the UK’s rating to Aa2 late Friday, as they play catch up with other agencies that had downgraded the UK last summer. GBP sold off c. 0.5% initially in an illiquid session just before the close, with GBPUSD dipping to lows of 1.3451 (Bloomberg) before regaining some of its losses to trade back above 1.3500 overnight.
We continue to see downside risks to GBP given the lack of clarity over a number of key measures, including the “Divorce Bill”. Looking ahead, the next key events in the Brexit saga are this week’s fourth round of UK/EU negotiations; and the UK Conservative party conference on 1-4 October.
Elsewhere, NZD fell c. 1.1% (vs. USD) amid disappointment after the incumbent National Party failed to get a majority in the weekend vote, with both the National Party and Labour going into negotiations with other parties to form a coalition.
After the Fed kept the December meeting live last week, Fed speakers and Friday’s US PCE inflation data will be watched ahead of a potential US tax reform proposal later this week. Elsewhere, we expect the RBNZ (Wednesday), Banxico (Thursday), BoT, CNB (Wednesday) and Banrep (Friday) to keep policy unchanged.

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