Driving The Currency Trading Markets

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Currency traders are focused on elections in Germany as well as, two central bank decisions which have been driving the currency trading markets.  On September 20, the Federal Reserve will conclude a 2-day meeting while the Bank of Japan will determine the future direction of interest rates.  The markets have priced in a dovish Bank of Japan, despite stronger than expected data released in Japan over the course of the past month.  Any hawkish surprise would drive the yen higher and negatively affect riskier assets such as Japanese stocks.

The Fed Should Remain Steady

The Federal Reserve concludes its 2-day meeting on Thursday September 20, and traders are already looking toward their October meeting as the timing for the discussion of when to begin an unwind of the Feds bond purchase program.  Quantitative easing was the catalyst for the stock rally in the U.S. beginning in 2012, and the reversal of this program will likely generate headwinds for riskier assets.  With the Fed looking to unwind monetary accommodation and the Bank of Japan keeping a dovish bent, the USD/JPY should continue to grind higher.

Will Merkel Need to Change Coalition Partners?

Germany’s Merkel heading for a change in coalition partner? That Merkel will remain in office after next Sunday’s election is almost certain and that means Germany’s main policies especially at a European level are unlikely to change going ahead. But while for many in Germany this has been the most boring election ever, there are still some interesting twists and for Germany’s political landscape going ahead a breakup of the grand coalition between the two major parties would only be beneficial.

For Merkel a coalition with the CDU’s old ally the liberal FDP would clearly be preferable to a much stronger socialist SPD coalition partner. The FDP though, while set to return to parliament after crashing out the last time, is unlikely to get sufficient votes to help Merkel, which brings the Green Party into play. This would not be an easy partnership, and the Greens carefully avoided the mention of such a possibility at their own party conference as it will go against the grain of the majority of party members. However, at state level there have been CDU-Green Party collaborations already and a coalition between CDU/CSU, liberal FDP and Green Party is the only feasible alternative to continuation of the CDU-SPD government judging by current opinion polls. For the SPD a return to the opposition would be a chance to rejuvenate itself and it would also prevent the AfD from becoming opposition leader in parliament, which brings important roles. Internationally a switch to the three party coalition is highly unlikely to bring a major shift in politics though and Merkel will remain the face of Germany in Europe.

The USD/JPY has continued to rebound after bottoming in September near the 107.50 level. The rally has coincided with a surge in riskier assets, but if the BOJ leans toward a hawkish tone, this rally could be quickly unwound. The exchange rate recaptured support near the 50-day moving average at 110.45 and is poised to test the 200-day moving average near 112.26.