German elections weaken Euro
By Vincent-Frédéric Mivelaz
German politics are showing signs of exhaustion. After losing more than 10% of votes in the State of Bavaria’s election two weeks ago, the grand coalition yesterday lost 20% in the State of Hesse. This puts additional pressure on German Chancellor Angela Merkel and her grand coalition in the national parliament. Investors wonder whether Germany will be able to maintain a stable government. Accordingly, the EUR/USD dropped: we expect the single currency to weaken further to 1.1360 short-term.
German GDP stagnated in the second half of 2018. However, there is little likelihood that left or right populists will take control – unlike in Italy’s anti-establishment coalition – so we do not foresee systemic risk for the monetary union.
Brazil right-shift boosts BRL
By Arnaud Masset
Jai Bolsonaro beat Fernando Haddad for Brazil’s presidency on Sunday. Financial markets started pricing in a market-friendly president – or a least a friendlier one than his opponent. On Friday, the Brazilian real rose 1.70% against the greenback as USD/BRL hit 3.6416, its lowest since May 24. Since mid-September, the Brazilian currency surged more than 15% against the buck, with USD/BRL falling from 4.21.33 to 3.6421, as investors gradually ruled out the possibility of Haddad election. The recovery is now mostly done. The global environment will remain challenging for emerging market countries, as the trade war between China and the US continues to weigh. Rising yields in the US will increase the pressure on those countries.
Elsewhere, FX markets started slowly this week, as most currency pairs were little changed during the Asian session. The exception was the New Zealand dollar that rose 0.70% against the buck: NZD/USD jumped back to 0.6550, up 1.30% from yesterday’s low. Elsewhere, the single currency was trading sideways around USD 1.1390; the pound sterling eased 0.09% to USD 1.2815, while the Japanese yen moved back and forth around the neutral threshold with USD/JPY stabilising around 111.95.