FX Weekly Insights — 05/10/21

Key Events

Tuesday

03:30 (AU) – RBA Interest Rate Decision (Consensus 0.1%, Previous 0.1%) 03:30 (AU) – RBA Rate Announcement
15:00 (EU) – ECB President Lagarde Speech

Wednesday

01:00 (NZ) – RBNZ Interest Rate Decision (Consensus 0.5%, Previous .25%) 01:10 (NZ) – RBNZ Rate Announcement
12:15 (US) – ADP Employment Change (Consensus 430k, Previous 374k)

Thursday

14:00 (CA) – BoC Governor Macklem Speech

Friday

12:30 (US) – Non-Farm Payroll (Consensus 460k, Previous 234k)
12:30 (US) – Unemployment Rate (Consensus 5.1%, Previous 5.2%)
12:30 (CA) – Net Change in Unemployment (Consensus 60k, Previous 90.2k) 12:30 (CA) – Unemployment Rate (Consensus 6.9%, Previous 7.1%)

RUB on the Ground

In focus oil price (OPEC+), the US data, global sentiment and on the MoF announcement of FX purchasing tomorrow (currently they buy $200 mio a day and with the recent rally in oil they might increase operations during October)

The CBR rate decision (22nd October) where it is highly like the CBR will

hike rates again by 25-50 bp due to accelerating inflation. RUB to remain in

72.50-74.00 range for now.

Key Stories

The Post-Merkel Era: The New Coalition in Germany

As Merkel’s party, the CDU/CSU, with Armin Laschet at its head, saw a strong decline in their popularity, the SDP, led by Olaf Scholz took a narrow victory with just over 25% of the votes. The CDU/CSU on the other hand, recorded their lowest number in history, just under 25%.

The goal is now for the SPD and Olaf Scholtz to constitute a government, which they hope to do by the end of this year. The most likely outcome is the constitution of a tripartite coalition, called the “traffic light” coalition, with the Greens and the FDP, led by Annalena Baerbock and Christian Lindner respectively. The narrow victory of the SPD, and the loss of the CDU/CSU have revealed the power and influence gained by smaller parties during these elections, and their future weight in the coalition. This is also seen as the Greens and FDP initiated negotiations within themselves before turning to the SPD.

The SPD’s left-leaning character will produce policies aimed at reducing income inequality, such as raising the minimum wage from 9 to 12 euros. Increasing taxes for the high-income owners and boosting investments have also been put forward by the SPD, as well as the Greens, but the FDP disagree with these two measures. Thus, there is a possibility that the FDP will be given the Ministry of Finance to facilitate the coalition.

More broadly within the coalition, there is some policy overlap. Indeed, they are pro-European, seek to modernise Germany and strongly push environmental goals. Climate change will be at the centre stage of politics, especially since the deadly floods this summer in the North Rhine-Westphalia region. Carbon neutrality is sought after by all three parties, even if it is within different deadlines: 2030 for the Greens, 2045 for the SPD, and 2050 for the FDP . Businesses are also strongly supportive of implementing concrete climate policy and investing in renewable energy in order to boost Germany’s competitiveness in this sector in the EU and the world.

Whereas there are clear dynamics in economic and environmental policy at play, the picture of foreign policy is much murkier, and will be an interesting element to observe over the coming months.

Britain’s Fuel Crisis, the Pandemic and Brexit

Due to a shortage of truck drivers, petrol stations across the UK have been without delivery leading to a veritable ‘fuel crisis’. Not limited to fuel, repercussions have been felt in the delivery of other goods across different sectors, such as poultry. The following price dynamics have compounded the effects of recovery in the oil market and economy-wide inflation. But as the pandemic has been heavily blamed for disrupting supply chains, not only in the UK, but across the world, the consequent reopening of the UK’s economy and the lifting of restrictions have instead pointed to Brexit being a core reason for these persistent logistics problems. The pandemic only masked the disruptions in supply chains, logistics, and commerce in general, caused by the UK’s departure from the EU. In fact, it is estimated that 20% of the estimated 100,000 truck driver shortfall is due to European labour leaving the UK market. Prime Minister Boris Johnson announced that the government would offer 5,000 three-month visas to attract European drivers to the UK, but this strategy is unlikely to work. Indeed, there is little appeal for European drivers to leave the EU, where they have a stable job with better conditions, for a three-month period, especially considering that European countries such as Germany and Poland are also facing shortages in drivers. As the UK remains unable to supply the normal market, it is entering a worrisome time as businesses are also starting to prepare for the supply of goods for the Christmas period. The fuel and truck driver shortages exemplify why the UK government has to adjust for the transition from business models based on hiring labour from abroad, in order to rethink the efficacy and reliability of supply chains in the Brexit era.

Chart of the Week – GBP/USD

Resistance: 1.3578 – Key Line (1.3700, 1.3848)

Support: 1.3165