Last Friday it seemed immigration
Had ceased as a cause of vexation
In Europe, but then
On Monday again
It suffered a new complication

The euro first rose, then declined
But now there’s a new deal designed
To finally forestall
For once and for all
The chance Merkel might have resigned

Remarkably, the immigration debate in Germany continues to dominate the news. Last night, German Interior Minister Horst Seehofer agreed to a new deal regarding the immigration situation and withdrew his threatened resignation. This led to a major sigh of relief in the markets as the fear of Frau Merkel’s coalition falling apart has once again receded. While Merkel clearly remains in a weakened state, if this deal can be signed by all the parties involved (a big if), the market may be able to move on to its next concerns. It should be no surprise that the euro has rebounded on the news, after all it has tracked the announcements extremely closely, but the rebound this morning, just 0.1%, has been somewhat lackluster after yesterday’s rout. Perhaps that has as much to do with the release of Eurozone Retail Sales data, which disappointed by printing at 0.0% in May, less than expected and yet another indication that growth in the Eurozone is on a slowing trajectory.

As an aside, if I were Mario Draghi, I might be starting to get a little more nervous given that the Eurozone economy is almost certainly trending toward slower growth and the ECB has very little ammunition available to counter that trend. Rates remain negative and QE is set to run its course by the end of the year. It is not clear what else the ECB can do to combat a more severe slowdown in the economy there.

But away from the daily immigration saga in Germany, the dollar has had a mostly softer session. This is primarily due to the fact that it had a particularly strong rally yesterday and we are seeing short-term profit taking.

China remains a key theme of the market as well, with the renminbi having fallen for twelve of the past thirteen sessions with a total decline of nearly 5.0%. While it has rebounded somewhat this morning (+0.35%), that is small beer relative to its recent movement. Last night, PBOC Governor Yi Gang was on the tape explaining that the bank would “keep the yuan exchange rate basically stable at a reasonable and balanced level.” That was sufficient for traders to stop their recent selling spree and begin to take profits. While there are some pundits who believe that the Chinese will allow the renminbi to decline more sharply, I believe there is still too much fear that a sharper decline will lead to more severe capital outflows and potential economic destabilization at home. As such, I expect to see the CNY decline managed in a steady and unthreatening manner going forward. But I remain pretty sure that it will continue to decline.

Other than those two stories, here’s what’s happening today. SEK has been the biggest winner in the G10, rising 1.25% after the Riksbank, although leaving rates on hold at -0.5%, virtually promised they would begin raising them by the end of the year. That is a faster pace than expected and so the currency reaction should be no surprise. However, keep in mind that Sweden is highly dependent on trade, and as trade rhetoric increases, they could well be collateral damage in that conflict. Aussie is the next biggest winner, having risen 0.7% after the RBA also left rates on hold, as expected, but the statement was seen as having a mildly hawkish tinge to it. But remember, AUD had fallen more than 4.5% in the past month, so on a day when the dollar is under pressure, it can be no surprise that the rebound is relatively large.

In the EMG space, MXN is today’s big winner, rallying 1.3% as the new story is that there are now more areas between the US and Mexico where President Trump and President-elect Obrador will be able to find common ground. Certainly both presidents are of the populist stripe, and so perhaps this is true. But my gut tells me that once AMLO and his Congress are sworn in (it doesn’t happen until December 1!) the market will recognize that the investment environment in Mexico is set to deteriorate, and so the currency will follow.

On the data front, yesterday’s ISM data was quite strong at 60.2, well above expectations and a further indication that the economic divergence theme remains alive and well. This morning we await only Factory Orders (exp -0.1%) and Vehicle Sales (17.0M), with the latter likely to be more interesting to market players than the former. Of course, tomorrow is July 4th, and so trading desks are on skeleton staff already. That means that liquidity is probably a bit sparse, and that interest in taking positions is extremely limited. Look for a lackluster session with the dollar probably edging a bit lower, but things to wind up early as everybody makes their escape.

Good luck
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