The US dollar remained under pressure in Asia following the disappointment that the FOMC did not signal a more aggressive stance, even though its delivered the nearly universally expected 25 bp rate hike. News that the populist-nationalist Freedom Party did worse than expected in the Dutch elections also helped underpin the euro, which rose to nearly $1.0750 from a low close to $1.06 yesterday. European activity has seen the dollar recover a little, but the tone still seems fragile, even though US interest rates have stabilized and the 10-year Treasury yield is back above the 2.50% level.
The US premium over Germany on two-year money peaked a week ago near 2.23. After the US yield fell in response to the Fed’s move, the spread finished near 2.12%, from which it has not moved far. Initial euro support has been found a little above $1.07. The first retracement target of the run-up is a little below there at $1.0690. The other retracement targets are seen near $1.0675 and $1.0655.
Few expected the Wilders in the Netherlands to have a say in the next Dutch government. He drew about 13% of the vote and will hold about 20 seats, which is five more than currently. Prime Minister Rutte’s party appears to have received the most votes and 33 seats, down from 41. The other coalition partners did worse. In particular, the disastrous showing of Labor means that Dijsselbloem, the current finance minister and head of the Eurogroup of finance ministers is unlikely to hold his post. Labor may have less than 10 seats in the new parliament, down from 38. The other coalition partner, Liberals, lost eight seats.
The new parliament will sit in a week and negotiations for a new government will begin. It will take some time. The last election (2012) toook 54 days to sort out, while in 1977 in took more than 200 day to form a new government.
The Fed hike and Dutch election were not very surprising. The surprise of the day was China. The PBOC announced a 10 bp increase in its medium lending facility loans and open market operation repos. Its statement did try to temper the surprise by noting that these increases were not the same as an increase in the benchmark rates. This seems to suggest that the increase in rates is unlikely to be passed on to households or business.
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