NZ and German Election Results Key Drivers through the Day, as Japan Looks Set to Call a Snap Election next Month

Weekend Election Results and the Asian Session:

Election results out of New Zealand and Germany were the key drivers through the Asian session, whilst the markets also needed to consider the ongoing rhetoric between North Korea and the U.S President, which has certainly escalated with global leader’s call for calm falling on deaf ears.

Looking to the election result in New Zealand, the National Party won on Sunday, with 46% of the votes, equivalent to 58 seats, with the Labour Party coming in second with 35.8% of the vote, translating to 45 seats. NZ First received 7.5% of the vote (9 seats), with the Greens wining 5.9% (7 seats) and the ACT with 0.5% (1 seat).

The National Party’s 46% falls short of a majority and expectations are that Prime Minister English will approach NZ First Party leader Peters to discuss forming a coalition to give the National Party a fourth term and a 67 seat majority in parliament.

Few will be expecting the National Party to fail to bring NZ First on board and how NZ First respond to the election result will be key for the Kiwi Dollar in the coming days, with National Party leader English saying that time will be taken to negotiate the best possible terms for a National Party led coalition.

The Kiwi Dollar slipped from $0.73324 to $ 0.72988 on the open before seeing steeper declines through the session to $0.72576 at the time of writing, as the markets responded to the result, with no material stats scheduled for release out of Asia through the Monday session.

While eyes were on the New Zealand election, of greater significance is the result of the German election on Sunday.

According to projections, the CDU/CSU won just 33.5% of the vote, with the SPD winning 21%, both parties seeing the worst election results since World War II. Both parties, but Merkel in particular, paid the price of brining in refuges that were seen to have contributed to the terrorist attacks earlier in the year.

The AfD Party, which is anti-Islam nationalist party, came 3^rd in the elections, with 13% of the vote, giving them 93 seats in the Bundestag. There were protests outside of the AfD headquarters in Berlin, but the reality remains that the AfD’s first seats is a reflection of a nation in disagreement with government policy on immigration and security. The German Chancellor acknowledging that she had hoped for a better result and that her government would not only have to deal with economic and security issues, but also address migration.

Following the result, SDP leader Martin Schulz brought an end to the grand coalition with Merkel’s alliance, limiting the Chancellor’s options and likely to extend the formation of government beyond weeks to possibly a few months, with the 19^th Bundestag projected to consist of a total of six parties for the first time since the 1950s.

As things stand, the most likely coalition would be with the CDU/CSU, the Free Democrats (FDP) and the Greens, with all parties having publically rejected a willingness to work with the AfD ahead of the election.

The rise of the AfD and an even more disintegrated German Bundestag, not to mention an end to the CDU/CSU – SDP coalition, will certainly be a negative for the EUR, with Merkel having to negotiate a coalition that will be of concern for the markets, particularly when considering the lack of common ground amongst the parties going into Sunday’s election.

Once the dust settles, which is likely to be quickly, focus will return to the stats and outlook on ECB monetary policy, but there will be a few licking their wounds as mainstream parties continue to lose ground to the up and coming. The result certainly brings into perspective Theresa May’s loss of support in the snap election and how Merkel handles the disappointment will be particularly interesting in the months ahead, the Chancellor having been seen by many as having a key role to play in the international arena, on both foreign policy and global security.

The Establishment will undoubtedly put on a spin on things and attempt to create a positive out of a negative, but behind closed doors, following Marine Le Penn’s performance in the French elections earlier in the year, there will no doubt be concern and immigration will be back into the spotlight, the Chancellor having been punished and needing to restore support and reunite a nation.

With election results rolling out, the Yen took a tumble on news hitting the wires that Japanese Prime Minister Abe will push for a stimulus package to coincide with the Prime Minister’s expected call for a snap election next month, to take advantage of the disarray in the opposition camp. The Yen was on the back foot on the news, down 0.20% at ¥122.21 against the Dollar, providing support for the Nikkei, with the markets brushing aside concerns over North Korea through the session.

The Day Ahead:

For the day ahead, stats are on the lighter side, with macroeconomic data through the European and U.S sessions limited to this morning’s Ifo Business Climate Index figures out of Germany, which are forecasted to be EUR positive, though the direction of the EUR through the day will unlikely be hinged solely on the data, with the markets likely to continue responding to the German election outcome, rising tension between the U.S and North Korea and that’s before considering central bank commentary through the day, with ECB President Draghi and the ECB’s Constancio scheduled to speak today.

Macroeconomic data out of the Eurozone last week, which included September’s prelim private sector PMI numbers were particularly impressive, adding more pressure on the ECB to begin removing accommodative monetary policy measures, with the ECB expected to provide the markets with details on the asset purchasing program and its intentions for next year, in the weeks ahead.

It’s a minefield of a week ahead, with a number of central bankers scheduled to speak through the week, including FED Chair Yellen, BoE Governor Carney, and BoJ Governor Karudo and also number of FED and BoE foot soldiers, which will add to the volatility through the week.

At the time of the report, the Dollar Spot Index was up just 0.05% at 92.216, with the EUR down 0.13% at $1.19352, having recovered from an opening $1.18975.