EUR/USD Drifts Lower On Political Uncertainty and Eco Miss

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Market Drivers for September 23th, 2013
Merkel wins – but fails to get absolute majority forcing coalition negotiations
EZ PMI show Manufacturing retreat while Services continue to expand
Nikkei closed Europe -0.21%
Oil $104/bbl
Gold $1328/oz.

Europe and Asia:
CNY HSBC PMI 51.2 vs. 50.9
EZ PMI Manufacturing 51.1 vs. 51.8
EZ PMI Services 52.1 vs. 51.1

North America:
EUR Draghi speaks 9:00
USD Flash Manufacturing PMI

It been a quiet and cautious opening of trade in the currency market with Japan out on holiday and economic calendar relatively empty. The biggest story of the night was the re-election of German Chancellor Angela Merkel who managed to win her third term but failed to nail down an absolute ruling majority. With ballot still being counted its appears that Ms. Merkel’s CDU party will be just 5 seats short of the majority as their junior partner the FDP failed to breach the 5% threshold and will now not make in into the parliament.

Although Ms. Merkel popularity is uncontested as the CDU gained its largest share of seats in the Bundestag since 1990, the inability to form a working government right away may create a pall over the German elections as she will now be forced to seek a coalition government. The most likely candidate is the opposition SPD party headed by Peer Steinbruck. The CDU and SPD ruled in an uneasy alliance from 2005-2009 but there may be strong resistance within the SPD to another power sharing arrangement on fears that the CDU would subsume the SPD agenda and reduce the party’s appeal even further.

Another possibility is a CDU coalition with the Greens which would be much more narrow in scope – but here again there may be reluctance on the part of the Greens who have already seen their popularity erode and may be fearful of the fate the CDU’s former junior coalition partner the FDP which saw its power base evaporate.

In either case, the uncertainty surrounding the coalition rule in Germany is likely to weigh a bit on the EUR/USD especially if talks drag on. The conventional view is that the CDU and SPD will ultimately agree to a power sharing arrangement with SPD getting the finance portfolio. Such a coalition rule would be the most stable for German politics as it would provide Ms. Merkel with ample majority in parliament to conduct her agenda.

Meanwhile on the economic front the flash PMI data from Eurozone proved mixed. Although the composite reading hit a 27 month high the underlying data showed a weakness in the manufacturing sector while services continued to gain ground. Manufacturing actually slipped below the 50 boom/bust level in France printing at 49.5 and declined to 51.3 in Germany from 51.8 the month prior.

The slowdown in manufacturing suggests that the EZ recovery may be hitting some headwind, especially as demand from emerging markets and China starts to slow down. That will no doubt trigger even more dovish commentary from Mario Draghi as he testifies in front of the EU parliament later today. Mr. Draghi is no doubt keenly aware of the recent appreciation of the EUR/USD above the 1.3500 ,mark and will most likely try to talk the unit down by stressing the ECB’s commitment to keeping rates low for the foreseeable future.

Meanwhile, in North America the only data point of note is the flash US PMI reading at 1300GMT with markets anticipating an increase to 54.2 from 53.1 the month prior. If the US data beats the EUR/USD could weaken further and test the 1.3500 support level as the day proceeds.

Boris Schlossberg
Managing Director

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