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🗓 Q3 Carries More Potential For Trending FX Markets Than Q2: Westpac

  • Germany federal election Sep: Merkel’s CDU/CSU coalition consistently enjoyed 35-40% support in the polls through last year and into early this year, but have since dipped to the 25-30% range. Support for the Greens meanwhile has surged from around 20% to 25-30%, making the Green Party indispensable in any post-Merkel coalition. Fiscal policy would likely turn far more pro- active and further pro-EUR integration steps are likely to be on the table. Bund yields would likely to rise sharply, not dissimilar to the rise in US treasury yields that followed the Georgia senate election results.

  • EU Recovery Fund prospects received a shot in the arm last week when Germany’s Constitutional Court said it would not put ratification on hold while it’s ruling was pending. The EU has been planning on the EUR750bn NextGenerationEU instrument to begin issuance in July and for fiscal transfers to member states to begin shortly thereafter. Last week’s decision keeps that timetable on track.

  • US infrastructure/Build Back Better: Washington could be debating infrastructure well into Q3. If successfully passed, medium term US prospects would improve. As shown in slide three, government outlays have not contributed much to GDP in recent years but a sustained lift would help boost trend growth directly (all other things equal) and indirectly enhance the supply side potential of the economy too. Admittedly the net contribution is trimmed by tax increases, but $2.25trn in infrastructure spending versus $2trn in taxes levied over 15 years still amounts to $150bn per annum net stimulus, around 0.7% of GDP, over the next few years.

  • Fed Taper: if payrolls are printing around 1mn+ for the next few months the more hawkish Fed officials will be itching for the Fed to lay out their tapering plans. A recent Bloomberg survey found a plurality expect the Fed to formally announce a tapering of asset purchases in 2021Q4. Fed officials will have a better read on recovery momentum beyond the reopening driven Q2 surge later in the year too, recalling that the Fed is focussed on realised progress rather than anticipated outcomes. There’s little doubt Q2 GDP will shoot the lights out but intriguingly, real time alternative indicators have been cresting in April, almost across the board



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