Dollar Mixed, Spain Election Inconclusive

Elections Voting in Spain

  • Spain’s inconclusive weekend elections have led to heightened political concerns
  • Azerbaijan moved to a free float, and the manat (AZN) fell to its weakest level since 1995
  • Brazil has a new finance minister, with former Planning Minister Barbosa replacing Levy over the weekend
  • Moody’s raised Korea’s rating by a notch to Aa2 with a stable outlook

Price action: The dollar is mixed against the majors in very narrow ranges. The Kiwi and the Loonie are outperforming, while the Norwegian krone and the Swiss franc are underperforming. The euro is trading flat near $1.0870, while sterling is trading just below $1.49. Dollar/yen is trading near 121.35, just below the 200-day MA near 121.60 today. EM currencies are mostly firmer. IDR, PLN, and KRW are outperforming while RUB and MYR are underperforming. KRW was helped by the Moody’s upgrade to Aa2. BRL is slightly higher despite Levy’s exit. MSCI Asia Pacific was up 0.1% on the day, with the Nikkei down 0.4%. MSCI EM is up 0.3%. The Shanghai Composite was up 1.8% while the Shenzen Composite was up 1%. Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open. The 10-year UST yield is flat at 2.21%, while European bond markets are mixed. Core yields are lower, but peripheral yields led by Spain are higher. Commodity prices are mixed, with oil down 1% and copper up over 3%.

 

Spain’s inconclusive weekend elections have led to heightened political concerns. Rajoy’s People’s Party lost a third of its seats, but won the most (123 seats) and has the first shot at forming a coalition government. The Socialists came in second with 90, while anti-austerity Podemos (69) and the Ciudadano party (40) came in third and fourth. There are 350 seats total, with the remaining 28 won by several minor parties. Now begins the horse-trading. By law, the new parliament must be called by January 13, and lawmakers then have two months to form a government. If not, then fresh elections must be called. This uncertainty could weigh on the euro.

PBOC lowered the USD/CNY fix for the first time after ten straight up days. We continue to advise investors not to get carried away with fears about CNY weakness. We see 4-5% weakness in the coming year, which is hardly worrisome. We think another devaluation is unlikely.

Brent oil is making new lows for this cycle, and is nearing the psychological 35 level. Supply concerns continue to dominated, and the lower prices continue to have global repercussions. To wit:

Azerbaijan moved to a free float, and the manat (AZN) fell to its weakest level since 1995. The central bank said in a statement that the move was made to “protect the country’s foreign exchange reserves at a crucial level to ensure the competitiveness of the economy” due to “intensifying external economic shocks.” Azerbaijan is the third-largest oil producer from the former USSR, and is the latest oil nation to find that its currency peg was unsustainable at current levels. Elsewhere, the Kazakh tenge (KZT) fell to record low against the dollar today.

Brazil has a new finance minister, with former Planning Minister Barbosa replacing Levy over the weekend. This was widely rumored, but the news is nonetheless very negative for Brazil. We agree with most commentators saying that Barbosa is unlikely to be any more successful than Levy in passing fiscal measures. On the other hand, Barbosa may not want more austerity as much as Levy did, and so some backsliding seems likely. There is no positive spin on this.

Moody’s raised Korea’s rating by a notch to Aa2 with a stable outlook. We agree with this move, as our own sovereign ratings model has Korea at AA/A2/AA. Actual ratings are now AA-/Aa2/AA- and so S&P and Fitch should follow suit in the coming months.