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Andrew Kositkun Foreign Exchange Head Trader
The Spanish elections over the weekend came in broadly in line with expectations. The socialist PSOE party came in first, winning 123 seats in the 350 member parliament. Their performance was then followed by the conservative PP party in second and LibDem Ciudadanos in third.
Based on the results, a coalition will need to be formed. Currently a socialist led left leaning government is the most likely resolution. However, this isn’t a straightforward outcome. While the socialist party had a better performance than in the previous election, winning 123 seats vs. 84, its most natural coalition partner, Podemos, saw a drop in their performance. As such, the combination of these two will not control enough seats for an outright majority.
With regards to timing, the formation of any coalition government will most likely not happen until later this summer (June/July) after the regional and local elections are completed. Regional and local elections are of particular importance because control of public expenditures (including healthcare and education) happen at the regional level and in big cities.
Ultimately Spain appears to be in for a prolonged period of political uncertainty, however, market reaction has been muted so far. The silver lining for Spain has been its growth, with 2019 growth beating other euro-area economies such as Germany, France and Italy. Should this positive growth story persist, expect markets to continue to be forgiving.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Both the USD and the euro have been relatively quiet to start off this week with the euro largely unmoved by the Spanish election results.
Most of the Asian currencies are trading in narrow ranges against the USD as Japan kicks off is Golden Week holiday this week.
Argentina’s central bank announced changes to its FX monetary system, a move supported by the IMF. The Argentine peso has been Latin America’s worst performing currency, down nearly 4% over the past month.
The next round of talks between the U.S. and China kicks off this week with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin set to meet Chinese Vice Premier Liu He tomorrow. While headlines have been constructive, significant issues remain unresolved.
President Trump also met with Japanese PM Abe to discuss trade with reports indicating that both sides are fairly far apart.
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