With daylight savings, the FX market doesn’t open until 8am this morning. The NZD had a decent run after the local close on Friday, which should limit any positive reaction for the NZD to Saturday’s election.
The election has been and gone and we are all none the wiser who will form the next government. The polls proved to be correct, with NZ First in the box seat to decide the next Prime Minister. At the margin, National’s election night tally was slightly higher and Labour’s slight lower than recent but special votes (15% of total votes cast) are likely to nudge the final result closer to the pre-election polls, making the outcome “as expected”. The six most obvious pre-election coalition permutations can now be whittled down to three. Importantly, the least market-friendly outcome of a Labour-Greens majority government is not mathematically possible so the market will take that as a positive outcome. We are unlikely to know the form of the next government until after special votes are counted on 7 October.
On Friday night, the NZD recovered its losses of the local trading session after North Korea was in the headlines again. North Korea’s Foreign Minister Ri Yong Ho said that the “highest level of hard-line” countermeasures which Kim Jong Un mentioned in a statement could refer to a “strongest-ever” hydrogen bomb detonation in the Pacific. After closing the local session around 0.7285, the NZD piled on about 0.7% to finish the NY session just under 0.7340.
The EUR was well supported after a series of very strong PMI readings for the euro-area, but selling pressure emerged above 1.20 and it finished the day flat around 1.1950. In Germany’s elections yesterday, Merkel is in the best position to form a government, but support for her party and fellow coalition party fell to historical lows, while the anti-immigration far-right party entered Parliament for the first time, so not a particularly market-friendly result.
GBP was the weakest of the majors, as PM May delivered an important Brexit speech. She said the UK would pay a €20bn down-payment towards what is likely to be an even higher an exit bill. She was also looking for around a two-year transition period after Brexit through to 2021 that avoids the cliff-edge scenario. There was a lack of detail and nothing fresh to excite the market too much. After the speech, Moody’s downgraded the UK’s credit rating by one notch to Aa2, meeting the already-downgraded ratings of S&P and Fitch. GBP fell to around 1.3450, before ending the session around 1.35.
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