The GOP Great Divide
Two distinct drivers monetary policy and political developments continue to mould investor sentiment. With the weekend to digest Friday’s US political headlines. the picture is not much clearer, and that uncertainty saw opening market’s sell USDJPY as we have not likely seen the last of the vast divide among the GOP. While there was little initial panic on Friday over the AHCA getting pulled, I suspect the markets will continue to view this failed vote as a litmus test for the ability of the Trump administration to drive the President’s agenda going forward. How quickly the Whitehouse administration can pivot to and get a convincing message across on tax reform will likely be the major focus early in the week. The market is desperately seeking any glimmer of optimism that the tax reform agenda can unite Republicans
A very light week for Australian data so look for external drivers to remain dominant. I suspect we will continue to see the Aussie’s tight correlation with global equities play out and with so much uncertainty brewing on Capitol Hill investors backbones will likely get tested out of the gates this week as stock markets will likely flounder.
In addition to the wobbly capital markets, iron ore prices rolled over collapsing some 19 % last week as rebar prices slumped. Markets sideswiped by China property kerbs and hikes in China’s repo rates that are designed to kerb excessive financial speculation as the mainland leaders appear determined about reining in unbridled debt-fuelled speculators.
The dollar has been under early pressure as the JPY is benefiting from the political uncertainty unfolding on Capitol Hill. Traders are are thinking we’ve seen the near term e high water mark for USDJPY as the market views the AHCA debacle as a foreshadowing of a severe watering down of Presidents Trump’s power in Washington. At a minimum, the lack of unity among the GOP suggests future Trump administration policies will be far from a rubber stamp. ON Friday we saw a case of buying the rumour on the significant tax reform hope, but today we sell the fact of the great GOP divide.
Ploughing through the 1.0830 level is very constructive for the EUR. The perception that political risks are diminishing in Europe but escalating in the US has the Euro poised to make further headway. The apparent shift in ECB to a less accommodative stance has traders thinking policy pivot as the recent inflation, and PMI data supports this notion.