Political Monday Creates Uncertainty in FX

Market Drivers September 25, 2017
IFO misses
NZ and German elections create uncertainty
Nikkei 0.50% Dax 0.26%
Oil $50/bbl
Gold $1293/oz.

Europe and Asia:
EZ GE IFO 115.2 vs. 116

North America:
No Data

The FX markets were shaken on Monday after a series of elections over the weekend failed to provide definitive results in either Germany or New Zealand.

Although the favorites in both cases won the most votes, they failed to produce a governable majority leaving the political situation in both countries unsettled. In New Zealand, the center-right National Party and their leader Bill English failed to win an outright majority and will now have to reach out to the populist minority to form a government. With 300,000 votes still to be counted final results won’t be known until October 7th and it may take months to form a functioning coalition government, leaving the political landscape unsettled.

The kiwi reacted badly to the news dropping to a low of .7251 before finding a small amount of support. This week the RBNZ will hold its quarterly meeting and markets will be watching carefully for any adjustments in monetary policy to the new reality of political deadlock.

Meanwhile, in Germany, Angela Merkel managed to win her fourth election for Chancellor, but he coalition fared far worse than the prior election losing nearly a fifth of voters. To make matters worse the SPD party which was also shellacked in the elections refused to join in the grand coalition forcing Merkel to try to form an unwieldy alliance between the far left Greens and the pro-business Free Democrats. The “Jamaica” coalition as it is being called due to the color of each party melting into the national flag colors of Jamaica, is an awkward alliance and may not prove to be durable in the Bundestag.

The euro clearly did not like the outcome and the pair drifted lower all through early European trade dropping to 1.1880. Again as with New Zealand, the worries amongst investors is that the political upheaval will force the central bankers to slow any progress on monetary tightening even as economic conditions remain robust.

With no US data on the docket today, the political news is likely to persist as a top theme in North American trade and EURUSD could test support at 1.1850 as the day proceeds.