Why the currency market couldn't care less about German state elections – Commerzbank

Why should a currency trader in Connecticut or Singapore care how the people of Saxony or Thuringia vote in a regional election? At first glance, this seems far-fetched. And so, it is not surprising at first glance that the currency market started this morning with exactly the same EUR levels at which trading ended on Friday, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

German state elections don’t move the markets, yet

“If you think about it a little bit further, it's no longer so clear. You don't have to imagine a scenario of EU-skeptical to EU-hostile parties in Germany getting ever stronger (although this is likely to be gradually more convincing today than it was recently). Even now, in some political fields, the strengthening of these political movements is forcing the established political parties – who fear further voter losses – to make concessions.”

“Therefore, one might rightly ask whether, in the hypothetical case of a new eurozone crisis, a German government would be willing to implement a rescue policy à la 2010/12. Of course, a new eurozone crisis is not currently on the cards. Nevertheless, should the lack of crisis-fighting mechanisms not increase the risk premium for EUR positions at all times? And, as long as Bunds are the eurozone's safe haven, there is hardly any chance of a government-organized rescue without Germany's participation.”

“But we should bear in mind that in 2012 it was not governments that ultimately succeeded in combating the crisis. The redemptive “whatever it takes” had to come from the ECB. It is the ECB that provides the backstop which prevents a critical escalation in the sovereign bond market. And because its promise is credible, such crises do not even arise. As long as the currency market believes that this will not change even when EU-critical parties get stronger, it has no reason to reevaluate the euro due to some election results.”