Intraday Market Thoughts

Politics Overcrowding, RBA Next

by Adam Button
Feb 6, 2017 22:57

Too often market commentators infuse politics into trading when it's a fringe factor but we're in a different era now. The yen was the top performer to start the week while the Canadian dollar lagged. The RBA decision is due up next. In the Premium video below "Gold Stands up to USD", Ashraf explains how and why EURUSD declined despite the rise in metals and selloff in USDJPY, along with the charts for the existing and future trades.

Economists love to talk about politics. If you turned on CNBC any time over the past decade, the conversation would almost surely include politics. Minor changes were blown out of proportion while central banking and global trade stepped back. For years, the best trade was to ignore politics and focus on everything else but it's all changing now.

Not since the financial crisis do political headlines and polls matter so much. It started with Brexit and is increasing daily. The political ebb and flow is the trade most days and it's not going to change any time soon.

If you look at the past twenty years, the underlying trend of open borders, open trade and globalization was uninterrupted. The political actors changed but the story stayed the same, hence, the rules in the markets were largely unchanged.

With the Brexit vote and Trump's election it's clear that the game is changed and financial markets and as financial markets try to figure out the rules, the flux will continue.

Brexit at first was treated as an isolated incident but it's now abundantly clear that populism, protectionism and antagonism in politics have arrived. The next fronts are France and Germany. Anti-EU National Front candidate Marine Le Pen continues to poll well as she touts a Eurozone breakup and curbs on immigration. Will she benefit from Socialist candidate Emmanuel Macron's loss of votes as he battles it out with Republican Fillion-- who has announced he would stay in the race. In Germany, the pendulum might be swinging in the other direction -- latest polls put Merkel's CDU coalition behind the SPD. Mexico also appears to be swinging to the Left.

What's clear is that the tectonic plates are shifting. There is still some sense of denial in markets that real change is coming but as the days pass by, it's beginning to feel inevitable. At the moment, no one knows exactly what the change will look like but volatility and unrest in markets are guaranteed.

In the short-term what it means is that central bankers are less important that politicians. A case in point will be the 0330 GMT RBA decision. The market is pricing less than a 15% chance of a hike or cut before year end. Unless the statement contains something dramatic, those numbers will hardly move. And without a credible threat on rates, then the inevitable anti-AUD jawboning will be futile and should be faded.


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