Major Overnight Headlines
• Euro Area PMIs mixed in September; Euro Area composite still suggests sluggish albeit upward momentum
• Swiss broad money supply growth soars again in August, this time by 10.4% YoY
• Merkel begins hunt for coalition partners, expected to pursue grand coalition with SPD (The FT)
From a financial markets perspective, in a list of plausible ‘bad’ outcomes, the result in Germany over the weekend is probably the ‘least bad’ outcome, but it’s still a bad outcome. For the time being, we don’t by any means view the result as a reason to get overly short of everything EUR-denominated or EUR/USD, but we do view it as an excuse not to ‘buy’. The reason is that the Euro Area is still within the upward leg of a credit and financial sector cycle triggered by OMT relief. Without the firm bedrock of a well-entrenched recovery in the real economy, many EUR- denominated assets and the value of the EUR will remain more vulnerable to uncertainty and bad news, if and when they occur.
At the same time, the noise in EUR/USD associated with the Fed’s decision not to taper its QE3 programme this month will continue to prop the pair up heading into October. However, we suspect that as Merkel seeks to allay fears of an extended period of uncertainty and form some sort of workable government, she will at least be very thankful that the Fed did not choose to taper in September. Although it’s now water over the dam, a September taper, tepid PMIs and this type of election result in Germany would have made the EUR ripe for some decent selling – both on the crosses and in EUR/USD.
As for the CHF, although the overall stance of the SNB is a distinct CHF negative force, the irony of the situation is that as Fed QE remains at a constant pace, SNB-fuelled imbalances in Switzerland may trigger further capital inflows – and therefore CHF strength. Watch 0.9000 in USD/CHF and CHF/JPY very closely in the weeks ahead.
Read the full report: FX Daily
BMO