AUD tumbles amid cautious RBA
The Australian dollar extended losses on Tuesday morning with AUD/USD testing once again the 0.7530 support area. The publication of the November RBA minutes showed, as expected, that the central bank maintained its dovish tone. In addition, the minutes revealed that the Reserve Bank was concerned about the job market outlook and persistent weakness in wage growth. Against such a backdrop, momentum is fading for the Aussie and sovereign rates are sliding. Moreover, spread between Australian and US treasuries reached a new bottom. The 2-y spread fell to 0.01%, while the 10-y year spread slid to 0.18%.
The monetary policy divergence between the Fed and the RBA suggests that the Aussie is not out of the wood yet. This should translate into further debasement for the Aussie. On the data front, it is going to be very quiet for the next couple of weeks. The RBA is holding its last meeting of the year on the 5th, while the third quarter GDP is due for release on the 6th. A break of the $0.75 threshold should open the road towards $0.7330 (low from May 9th).
Euro does not suffer much despite German political crisis
There is major political crisis that is happening now in Germany. Angela Merkel, the German Chancellor is unable to build a majority within the Bundestag. The coalition that Merkel was trying to build with the liberals and the ecologists has failed. This is the first time since 1949 that this occurs.
The main reason why the collation failed was the migration issue. Liberals clearly didn’t want to pursue the current politics. Some voices now declare that the Liberal party is a “light far right party”. We recall that around 1.2 million migrants have been welcomed in Germany during 2015 and 2016. There is clear willingness for more borders controls in the political German landscape.
How this political issue can be solved? Actually, Germany could be called to vote again at the start of next year even though they just voted in September. Merkel is definitely in a difficult position.
Right now, the euro has not suffered from the ongoing political crisis. Yet, the euro is down from 1.18 to 1.17 since yesterday amid uncertainties. We believe the euro should continue to go down as the correlation with Germany is significant. Problems of the first European economy are also Eurozone’s problems.
