Euro to keep climbing on German economy
By Yann Quelenn
Germany’s politics might be fragile, but its economy is at its strongest since 2011. The IFO business climate indicator, released this morning, has hit an all-time high. Other German data are improving: GDP increased 0.8% from Q2 to Q3, and inflation is beginning to creep toward normality.
This economic locomotive will overpower the political uncertainty, at least for now, and keep the Euro strong against the USD. The Euro will also be bolstered by uncertainty over the US Federal Reserve’s tightening of the dollar supplies. The Fed is dithering, because it doesn’t want to prick the bubble of today’s bond markets.
It’s too early to tell the composition of Germany’s next government. Chancellor Angela Merkel has so far been unable to build a coalition, which has weakened her aura. At the same time, pressure is building on the Social Democrats to come back to the table and make a coalition happen. The next days could be a long time in politics.
WWJD for the USD
By Arnaud Masset
What would Janet do? This is the question plaguing dollar investors. Of course Janet is Ms Yellen, Chair of the US Federal Reserve. Her cautious moves towards tighter money, coupled with gains in employment and pending tax reform were supposed to trigger a dollar rally – but didn’t.
The current situation is dicey. Tax reform is still moving, but its outcome is unsure. And the US economy is softening. October durable goods orders (released on Wednesday) came in below expectations. A week earlier, October’s retail sales painted a mixed picture. It’s unclear how much of the slowdown is fundamental or due to hurricanes. The Fed’s statements have been wishy-washy. Already in October the Fed has started to reduce its giant balance sheet. So far this hasn’t had much effect on the long-end yield curve. Next month will come an interest rate hike.
All this means that dollar buying will continue, especially against high commodity currencies such as the Aussie and the Kiwi. However, against the Euro this probably won’t hold – the single currency is likely to climb against the USD in coming months.