Market Drivers October 23, 2017
Abe wins the snap election
Catalan conflict intensifies
Nikkei 1.11% Dax 0.27%
Europe and Asia:
CAD Wholesale Sales 8:30
With nothing on the economic calendar today, FX markets were driven strictly by political headlines at the start of the trading week with USDJPY rising on the positive news while euro sank on negative developments.
In Japan, Prime Minister easily won the snap election carrying more than 2/3 majority in the Japanese diet and becoming Japan’s longest serving Prime Minister. The win was viewed positively by the markets as it maintains and perhaps even intensifies the continuity of Abenomics which has seen Japan post some of the best growth in decades while maintaining an ultra-accommodative monetary policy.
USDJPY gapped higher on the open and rose to 114.09, but backed off the highs on profit taking and some risk aversion flows. The Abe win was well anticipated, so the reaction was not expected to have much impact on FX trade, but it nevertheless underpins positive sentiment and could provide scope for further upside moves later in the day today especially if US yields continue to rally and the benchmark 10 year moves above 2.40%.
In Europe, however, the news was far less sanguine as the standoff between Catalonia and Madrid drags into the third week of no settlement. Madrid has voted to strip the current Catalan government of all it power and curtail some of the powers of Catalan government, but Catalan officials have refused to recognized Prime Minister Rajoy’s authority and will convene on Thursday to formulate a response.
Although market reaction so far has been to essentially ignore the internecine bickering in Spain, with EURUSD generally unmoved by threats from either side, today escalation of hostilities finally had some impact on the pair as it dropped below the 1.1750 mark in early morning European trade. It’s difficult to imagine that the Catalan conflict would result in some sort of real rupture, but political risks can always spin out of control and euro could certainly feel more downside pressure in the next few days.
In North America, the calendar is barren save for Canadian wholesale sales which are expected to decline to 0.6% from 1.5% the period prior. The loonie saw significant weakening on Friday in the wake of very weak CPI and Retail Sales data, and if today’s report confirms the slowdown in demand USDCAD could push towards 1,2700 and the day proceeds.