Forex Euro Rises To 3 Week Highs, Dollar Slumps

Dave Shellock

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Monday 21:00 GMT

What you need to know

  • Euro down 0.5 per cent versus dollar, Dax rises 0.5 per cent
  • Wall Street edges higher ahead of Thanksgiving holiday
  • Pound up on hopes for progress in Brexit talks
  • Brent oil hovers around $62 a barrel
  • Gold gives back Friday’s big advance

Overview

Resilient performances by the euro and eurozone stocks and government bonds provided a big talking point for the markets after the overnight collapse of talks to form the next German coalition government.

Politics was also a factor behind sterling’s rise to a two-week high against the dollar, as participants took a more optimistic view of the progress of Brexit negotiations. Turkish assets came under pressure, as tensions between Ankara and Washington intensified.

Wall Street inched higher although trading was subdued ahead of the Thanksgiving holiday, with energy stocks proving to be a drag as oil prices staged a fresh retreat.

Hot topic

The euro had a volatile session as it fell as low as $1.1723 against the dollar in Asian trading hours — only to rally to $1.1808, before sliding back down to $1.1732 — 0.5 per cent weaker on the day.

The single currency was down just 0.1 per cent against the yen at ¥132.13.

The yield on the 10-year German Bund, meanwhile, held steady at 0.36 per cent while Spanish and Italian 10-year yields were slightly lower. Yields move in the opposite direction to the price of the security.

Most analysts argued that the euro was unlikely to weaken dramatically because of events in Berlin, despite uncertainty over Angela Merkel’s future as German chancellor.

“The euro has proved pretty impervious to political risk since [Emmanuel] Macron won the French presidential election in May,” noted Steve Barrow, head of G10 research at Standard Bank.

“Even the struggle for independence in Catalonia has failed to undermine the euro and we suspect that the current tensions in Germany will be the same.”

Carsten Brzeski, economist at ING, said the collapsed talks would probably have no impact on the German economy in the short run.

“The examples of Belgium or the Netherlands, when having a caretaker government did not do the economy any harm for a long while, even seem to suggest that caretaking governments do more good than harm,” Mr Brzeski said.

“However, given the lack of structural reforms and the urgent need for investments in digitalisation and education, German politicians should not waste too much time if they don’t want to put the economy’s future at risk.”

Jane Foley, senior currency strategist at Rabobank, highlighted that a weakening of Ms Merkel’s power could also be a setback for the UK, given signs that she might be prepared to take a softer stance over Brexit negotiations.

“Last week, it was reported that Ms Merkel was worried that taking too tough a stance against the UK over Brexit could further weaken [prime minister Theresa] May’s position at home.

“In turn this could raise the prospects of Mrs May being replaced by a hardline Brexiter which reportedly would not be welcomed by Germany’s chancellor. The UK imports more goods from Germany than from any other European nation.”

But the markets appeared relatively relaxed, as hopes grew that the deadlock in Brexit talks could be broken soon amid expectations that the UK’s “divorce bill” offer to the EU would be increased.

Forex and fixed income

The pound was up 0.2 per cent against the dollar at $1.3236, while the euro was 0.7 per cent weaker at £0.8861.

Meanwhile, the dollar rose 1.3 per cent versus the Turkish lira to TL3.9232 while the yield on the country’s benchmark 10-year government bond jumped 29 basis points to a record 12.52 per cent, according to Reuters data. Turkish stocks fell 2.2 per cent.

The Turkish government accused the US of engaging in a “clear plot against Turkey” by alleging that a number of Turkish residents had violated sanctions against Iran.

The 10-year US Treasury yield was up 1bp at 2.37 per cent.

Equities

The weaker euro offered support to German stocks, with the Xetra Dax reversing an early fall to end 0.5 per cent higher. The pan-European Stoxx 600 rose 0.7 per cent, while the FTSE 100 in London edged up just 0.1 per cent.

In New York, the S&P 500 rose 0.1 per cent to 2,582, helped by gains for technology stocks. Volumes were light as the holiday-shortened week got under way.

“There is little US dataflow and the discussions around the tax plan will probably shift to the back burner as the Senate winds down for the holiday,” said analysts at TD Securities.

Commodities

Brent oil settled at $62.22 a barrel, down 0.8 per cent on the day but off an earlier low of $61.44, as participants awaited an Opec meeting next week.

Friday’s hefty rise for gold — to a one-month high — evaporated as the metal sank $17 to $1,277 an ounce.

Additional reporting by Michael Hunter in London and Hudson Lockett in Hong Kong

For market updates and comment follow us on Twitter @FTMarkets


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Source : https://www.ft.com/content/362787d8-cda4-11e7-9dbb-291a884dd8c6

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