Germany: Collapse of collation negotiations - SocGen

After the collapse of German collation negotiations, the euro is 0.1% lower against the dollar, and 0.4% lower against this morning’s best currency, the Kiwi, points out Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“That is not a dramatic reaction, but it is consistent with insouciance in European bond markets, where neither swap spreads nor peripheral yield spreads have reacted significantly yet. A break higher in EUR/USD may still require the large net long position in CFTC data to shrink, and the trend in relative yields to start moving back in the euro’s favour. It might just be that a political vacuum is no worse for Germany and the euro than it has been for, say, the Netherlands or Belgium.”

“There are, I suppose, four plausible outcomes in Germany. The first is that the Jamaica coalition is revived, which seems unlikely. The second is that the CDU/SPD coalition is revived but that seemed to be what the electorate were unhappy with at the election. The other two, fresh elections or the CDU ruling as a minority government, are untried in the modern era. The only real enthusiasts for new elections are the AFD, who might build on their strong showing last time around. Maybe what markets are saying overall is that minority government or further coalition talks are fine, as long as the economy is growing. As for the FX conclusion, the EUR/USD 1.1480-1.1880 range is holding. If we can get positioning right and relative yield trends moving in the euro’s favour, we can break higher.”