The Euro doesn’t know what to do with the German election results, which will not provide Merkel with a mandate to do anything besides what she has been doing for the last four years: damage control.
Germany’s election result is an interesting one, as Merkel won a huge victory for herself and her Christian Democrats (CDU) but will need to form an awkward coalition with one of the parties to the left as her junior coalition partner, the Liberals (FDP), just barely failed to reach the five percent parliamentary threshold. The anti-Euro Alternative für Deutschland (AfD) also saw a near miss of the threshold. From here, one would expect that Merkel continues an EU policy of putting out brushfires one at a time — starting with the situation in Greece, as this election was not a mandate for strong new leadership on EU policy. On the contrary, while the AfD result saw a failure to reach the threshold, it was a near miss, and some in the CDU will feel pressure to counter the risk of AfD gaining further ground.
The theory is that a “grand coalition” with the Social Democrats (SPD) — or even a very awkward CDU/Green coalition — could mean a more pro-EU stance from Germany, but any such government would likely have a hard time reaching a strong consensus on decisions. The overall risk, therefore, is of a Europe that continues to stagger into the future, reeling from one crisis to the next without ever fully addressing the fundamental problem, which is that the EU is a house without a foundation with its one currency and central bank and multiple sovereign framework.
Elsewhere, the Chinese flash HSBC/Markit manufacturing PMI came in more strongly than expected and this boosted the Aussie from its lowest levels in a couple of sessions and thus kept AUDUSD clear of the first major support area at 0.9300/50. Still, the rally looks less than convincing at the moment after the deep retracement and the sell-off has softened up the up-trend, so we have a technical argument here for leaning against further strength. The inability of gold to maintain a rallying stance also suggests that something is misfiring in the idea that this taper-delay is the trading equivalent of the hint at QE2 back in 2010. That, and the fact that 0.9500 was an excellent technical target for the squeeze (see my post from back on Sep 10) has me wondering if we are ready to pivot lower again soon.
Chart: AUDUSD
The 0.9510 area was a major Fibonacci resistance level, though the bears need to take out the 0.9300/50 levels next to argue that the near-term highs are in.
The preliminary EU PMI surveys for September were out today. The trend toward better data looks reasonable in places, but is it sustainable when EU banks still aren’t lending? The German survey picture was a bit mixed, with a slightly weak showing on the manufacturing survey, but with a strong services number. The Eurozone-wide surveys showed small improvements.
Looking ahead
Don’t forget the US political situation this week and in coming weeks, which is likely feeding into the Federal Open Market Committee's (FOMC) decision-making process on the taper (the more confrontation and haggling and austerity, the more delay to the taper). The Republican house has really put down the gauntlet by pushing to defund Obamacare and we are a week from the new US fiscal year, with more political mayhem possible in the weeks that follow due to a fresh need to raise the arbitrary debt ceiling. See Washington Post’s coverage of the day-by-day schedule for this week.
As well, each passing day brings us closer and closer to the nomination of the next Fed chairman. Obama is already desperately tardy in announcing his choice, but could all of the hubbub surrounding the budget mean a delay of this announcement until at least early October?
EURUSD techs – the pair can consolidate for now, but anything below 1.3400/50 zone and we start to wonder whether the up-trend is compromised. The main upside resistance comes in at the high of the year above 1.3700.
USDJPY techs – I would like for 98.50 to survive as support, otherwise the odds rise of a run on JPY shorts. AUDJPY is more technically interesting if the JPY is about to get up to some mischief in strengthening here….
Economic Data Highlights
- China Sep. HSBC/Markit Flash Manufacturing PMI out at 51.2 vs. 50.9 expected and 50.1
- Germany Sep. Preliminary Services and Manufacturing PMI (07:30)
- Euro Zone Sep. Preliminary Services and Manufacturing PMI (08:00)
- US Aug. Chicago Fed National Activity Index (12:30)
- US Fed’s Lockhart to Speak (13:20)
- US Fed’s Dudley to Speak (13:30)
- Switzerland SNB’s Jordan to Speak (15:15)
- US Fed’s Fisher to Speak (17:30)