Euro Roundtrips on Failure of German Coalition Talks – Can Merkel Benefit from “Macron Effect?”

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Market Drivers November 20, 2017
Euro does a roundtrip on German coalition talks
German President to make appeal to all parties
Nikkei -0.60% Dax -0.23%
Oil $56/bbl
Gold $1291/oz.

Europe and Asia:
EUR German PPI 0.3% vs. 0.3%

North America:
EUR Draghi Speech to EU Parliament 10:00

A wild and unexpected opening to Asia session trade today with EURUSD collapsing within the first hour of the open on news that German coalition talks failed when FDP walk out of the negotiations at nearly midnight Berlin time.

The news injected a healthy degree of volatility into what was expected to be a somnolent week of semi-trade with North America essentially offline from Wednesday onward for Thanksgiving holiday. Instead the euro dropped like a stone in the first few hours of dealing in Asia hitting a low of 1.1723 as markets tried to process the news.

Ms. Merkel is now faced with a series of unpalatable decisions. She can try to form a government as a minority leader, she can try to form a new coalition with SPD or she can call for fresh elections. The latter choice is perhaps the least attractive to the market as it would create massive uncertainty and fear that the resurgent far-right in Germany may capture even a greater part of the vote. The reverse, of course, can also be true – where Merkel could benefit from the “Macron effect” and galvanize her supporters to go to the polls to offset the far-right presence.

For now, unconfirmed reports that the FDP may be willing to save face and support the minority government while not being part of it provided a temporary boost for the euro. The pair reversed all its losses and recaptured the 1.1800 figure in morning European dealing. The market will get more info later today at 13:00 GMT when German President Steinmeier will make a statement, and he will no doubt appeal to all parties to return to the talks. Steinmeier has the power to call new elections, but it’s doubtful that he will do so this quickly before exploring all other options to overcome the impasse.

For now, the EURUSD clings to the 1.1800 line but will not stay there for long as any positive or negative news will lurch up or down as the day proceeds.

Boris Schlossberg
Managing Director

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