Monday AM: EUR - German Political Risk, GBP - Under Pressure, Dollar on the Front Foot, NZD + AUD - Trade Spat Crossfire

Image © Stefan Yang, Adobe Stock

Euro: Merkel's Future Questioned

The Euro is in focus at the start of the new week with some signs of volatility stemming from concerns over the stability of Germany's ruling coalition partnership.

"I expect EUR to come under pressure as Chancellor Merkel faces dissent within her fragile coalition. It took several months for her to form a government in the first place. Now, Minister of the Interior Horst Seehofer, who is also the head of one of the coalition partners, is refusing to follow her instructions with regards to immigrants. If he continues to go against her wishes, she may have to dismiss him," says Marshall Gittler at ACLS Global.

Under such a scenario, Seehofer's party (CSU) would probably leave the coalition, causing it to fall two votes short of a majority in the Bundestag.

"Watch for more news on this dispute. Note that Seehofer said over the weekend that “nobody in the CSU” has an interest in ending the coalition or kicking Merkel out, so they will certainly try to find a solution. If nothing else, this means the problem of immigration will be one of the key issues to address at the 28-29 June EU summit," adds Gittler.

Today meanwhile sees the start of the ECB's conference on central banking in Sintra, Portugal.

Last year's event caused notable movement in key currencies, and we will be watching headlines at this years event.

Mario Draghi opens the event this evening and no major policy-related announcements are expected.

Watch Wednesday's panel discussion that includes the Draghi, the Fed's Powell, Japan's Kuroda and Australia's Lowe.

Sterling: Soft Start

The Pound is one of the weaker players at the start of the new week with no significant headlines to pin the performance on.

The data calendar is empty today and the currency will likely take guidance from external drivers and developments on the political front regarding Brexit.

Thursday's Bank of England policy meeting forms the highlight of the week for Sterling.

ACLS Global's Gittler gives a steer on what to expect:

"The Bank of England is certainly going to be the more interesting of the two central bank meetings. The market sees almost no possibility of raising rates. Rather, the question will be what hints they give about the future course of policy. After three months of declines, inflation stabilised in May at an above-target level.

"Does that make it more likely that they’ll hike in August? The odds of an August rate hike are put at around 50-50.  But earnings growth is slowing, meaning there’s little urgency to hike. At the end of the day, investors will be watching the tone of the meeting and waiting to see if there are more than two dissents."

US Dollar: Likely to Rise

The Dollar is looking firm at the start of a new week characterised by softer global stock markets; the currency tends to display safe-haven characteristics in such circumstances.

When markets are selling, often holdings are converted into Dollar's, which in turn creates a bid.

But there are further constructive points regarding the currency which might prove supportive:

"I think the market’s attitude towards the Dollar has fundamentally changed. Even the trade dispute with China doesn’t seem to be hurting sentiment that much. And now with the monetary policy divergence theme coming to the fore again, I’d expect the Dollar to continue to rise," says Gittler.

New Zealand Dollar: On the Defensive for Now

For the NZ Dollar, global issues matter for now.  

The US-China trade spat escalated late last week and has created an air of caution amongst investors.

China and the US announced like-for-like trade tariffs on Friday: the US where are planning two waves of tariffs against China. The first $34bn tranche will be a 25% rate on 818 product lines, starting 6 July 2018. The second $16bn tranche is on 284 proposed lines which will undergo further review in a public notice and comment process.

China was quick to respond, mirroring the $34bn to be implemented on 545 product lines on 6 July and another $16bn under review. Rural products were not spared with soy, corn, wheat, and meats on China’s first list.

This is important for the NZD:

"The NZD has suffered as a result and is likely to remain on the defensive for now," says a note from ANZ Bank in a brief to clients. "The global trade spat is likely to dominate near-term."

Australian Dollar: Tipped to Underperform

Regarding the above-mentioned trade dispute, the Australian Dollar is also likely to take note of global developments.

"Every time trade war fears escalate, the AUD seems to underperform," say ANZ.

This week we will be watching for comments from RBA governor Lowe as he appears on a panel at the ECB's forum on central banking being held in Portugal.

On Wednesday he appears alongside the ECB's Draghi, the Fed's Powell and the BoJ's Kuroda.

Also keep an eye on the release of the RBA's minutes to their June meeting, due for release on Tuesday at 02:30 B.S.T.

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