Euro Falls on German Stalemate
Well the quagmire that
is the German elections is by far the dominant trading concern in the euro as we
head into the new week. With neither Merkel nor Schroeder winning a
clear majority the prospect of a stalemate and political deadlock has gripped
Germany. “Worst of all possible outcomes,†was how one German business executive
put it and the European currency has felt the brunt of market disappointment by
falling to 1.2104 in early European trade before rebounding slightly.
But we wonder if the market may be over reacting
to the news. The “grand coalition†government while cumbersome, may be
surprisingly effective as centrist politicians unshackled from their leftist and
rightist partners would be free to enact a reform agenda that is clearly the
desire of most of the populace. In fact, a close look at both Schroeder and
Merkel’s platforms reveals remarkable similarity on key economic points such as
the necessity to reduce corporate income tax rates. If anything parts of
Schroeder’s agenda are more market friendly, especially in light of the fact
that Merkel wants to increase the Value Added Tax while Schroeder actually
proposes a lowering the corporate tax burden by a greater amount than Merkel.
The key to euro’s stability going forward,
however, will be the ability of both politicians to set their ego’s aside and
work out a reasonable compromise. At first glance this appears to wishful
thinking, as neither Mr. Schroeder not Ms. Merkel were willing to concede the
election nor entertain the idea of working together. Such obstinacy will no
doubt only roil the currency markets further and the euro may test 1.2000 figure
this week if the market feels the political situation is at an impasse. But if
popular pressure on German politicians forces them to work out a quick
compromise, the euro may well rebound in the coming days.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.