Everything else equal, what’s the trade? That’s the question we pose as markets drift in a holiday-shortened week. The pound was the top performer while the euro lagged. The RBA meeting minutes are up next. A 2nd EUR trade was issued today with 3 charts & notes as part of the "EUR Tactical Set-up".
German politics will likely remain the major headline-maker in a week with a light economic calendar and with US Congress on break. Merkel and her potential coalition partners have reached an impasse and are talking about a fresh election. The President is attempting to broker a deal and Merkel said she doesn’t want to try to govern with a minority.
Expect some twists and turns but none of the potential scenarios are likely to leave a major mark on the euro. Initially, EUR/USD slumped 70 pips on the headlines but it recovered. Later in the day, EURUSD sagged again but that was part of a broader climb in the US dollar boosted by stronger than expected US LEI report.
And that brings us to the quiet trade. Risk assets have benefitted in nearly every environment over the past decade but the best backdrop has been the days with little-to-no news. That was the story on Monday and it’s likely to be the same (especially in New York trading) for the rest of the week.That could help to underpin a minor rebound in the yen crosses and a creep higher in Treasury yields.
Expect higher volatility in Asia and Europe. The Aussie could be on the move when the RBA meeting minutes are released at 0030 GMT. Commentary about wages and financial stability is key along with insights about lower inflation projections.
Another event to watch is the 0430 GMT Japanese all industry activity index. It’s forecast to fall 0.4% m/m.
