Merkel Uncertainty Tanks the EUR

Earlier in the Day:

Economic data out through the Asian session was on the lighter side this morning, limited to Japan’s October trade figures. While Japan’s trade surplus narrowed from ¥668bn to ¥285bn, coming in below forecasts, the adjusted trade surplus widened from ¥0.27tbn to ¥0.32tn. Imports surged by 18.9%, year-on-year, while exports increased by 14%, short of a forecasted 15.8% increase.

Despite export figures falling short, exports remained steady when compared with September, where exports had increased by 14.1%, which continues to reflect strong demand for Japanese goods.

The Yen moved from ¥111.969 to ¥112.071 upon release of the data, though there was more for the markets to consider through the early part of the day. News hit the wires in the early hours of German Chancellor Merkel’s failed attempt to form a coalition government with the Greens and the FDP. The deadline had been set for Sunday, following an extension from Friday and the markets had been more focused on events on Capitol Hill, which had seen the Dollar go into reverse at the end of last week.

At the time of writing, aside from a tumble in the EUR, the currency markets were relatively flat. The Yen was up 0.04% at ¥112.06 against the Dollar, with the Aussie Dollar up just 0.01% at $0.7565.

In the equity markets, it was a mixed bag, with the Nikkei, CSI300 and ASX200 seeing red. News of a greater focus by China’s regulators to manage shadow banking weighed on the China markets, though the CSI300 managed to recover from heavier losses in the day to a 0.25% decline at the time of writing. Despite the negative sentiment in China, the Hang Seng bucked the trend, recovering from intraday losses to move into positive territory late in the session.

The Day Ahead:

Following a bounce in the EUR on Friday, supported by Draghi’s upbeat sentiment towards the Eurozone economy and of course, softness in the Dollar, the EUR took a tumble in the early part of the day.

The failure of German Chancellor Merkel to form a coalition government has put the cat amongst the pigeons in European politics. Few had expected coalition talks to fail and focus had remained on monetary policy and sentiment towards the economy, despite Friday’s deadline for talks having been extended through to Sunday evening.

The EUR fell 0.66% to an intraday low $1.17122 before a partial recovery, though pressure remains. Political stability in Germany is considered to be key to both political and economic stability within the region. The latest news raises significant uncertainty over what’s next and whether fresh elections will be called. From the Chancellor’s perspective, fresh elections would raise the prospects of an end to Merkel’s position at the top. Such uncertainty will likely grip the markets in the coming days, with the latest polls having shown that support for the CDU/CSU had fallen to a 6-year low going into the weekend talks.

With economic data out of the Eurozone limited to Germany’s wholesale inflation figures, German politics will take centre stage and even a scheduled Draghi speech this morning may not be enough to calm the markets.

Across the Channel, there are no material stats out of the UK through the day and focus will remain on Theresa May and the infighting that has seen the Conservative Party close to ruin. Merkel’s most recent woes may provide a ray of hope for Brexit negotiators, but for now concerns over Wednesday’s Budget will likely be the biggest consideration for the markets.
At the time of writing, the Pound was down 0.08% at $1.3205, with direction hinged on noise from Number 10.

Across the Pond, there are no material stats scheduled for release through the day. Recent Dollar weakness reversed in response to the news from Germany, with the Dollar Spot Index up 0.33% at 93.967. The markets will likely be listening out for any noise from Capitol Hill on both, progress on tax reforms and the ongoing investigations into the U.S President’s election campaign.

It’s likely to be risk off in Europe through the session, though this time around the EUR is unlikely to garner the usual support, with the Dollar likely to be in the driving seat through the day.