German chancellor Angela Merkel returned a very strong showing the weekend elections, with the CDU/CDU bloc in parliament taking 41.5% of the vote. Contrast this with many other Eurozone nations, where incumbent leaders have more often than not been ousted at the ballot box. For now though, we will have to endure coalition negotiations, given that the current coalition partner (the FDP) failed to reach the required 5% threshold for representation in parliament.
This means that a grand coalition with the SDP is the most likely outcome, but it could be some time before both parties negotiate such an outcome. The upside is that Merkel is in a very strong position in such negotiations, but it’s by no means going to be easy, not least because the SPD leader has already stated that he would not serve in such a grouping. The euro was steady to slightly firmer on the outcome, but will be keen to see a relatively quick resolution to coalition negotiations.
Data/Event Risks
EUR: The preliminary PMI data will be closely watched as investors look for signs of a sustained recovery in the Eurozone the overall positive GDP reading for the second quarter. For the Eurozone, both services and manufacturing data are seeing rising by 0.3 on the headline indices to 51.0 and 51.7 respectively.
Latest FX News
CNY:Â The HSBC manufacturing flash PMI data for September was better than expected at 51.2, giving further hope to the notion that China is slowing in an orderly fashion, rather than seeing a more protracted and sustained slowdown. CNY continues to hold steady, but gap between on-short and off-shore (CNH) has been growing steadily in recent weeks (off-shore rate firmer).
AUD:Â The Aussie gaining some traction on the back of the numbers out of China, allowing a move back above the 0.9400 level through the Asia session.
GBP:Â Despite some brief dips below, sterling is holding above the 1.60 level on GBPUSD, but remains winded after the weaker than expected retail sales data seen last week.
USD: Comments from Fed’s Bullard on Friday kept the dollar on its toes, as he suggested that October tapering was possible after close September decision (describing it as “borderlineâ€). This is likely to keep an underlying bid to the dollar.
Further reading:
Merkel falls short of an absolute majority – negotiations could take time
Non-taper rally ran out of steam
