EUR/USD enjoyed the FBI Effect and moves on Draghi as well. But what about German politics? The team at Deutsche Bank analyzes the political risk coming from the euro-zone’s largest economy:
Here is their view, courtesy of eFXnews:
The market may be underestimating the risk of German Chancellor Merkel deciding not to run again in the 2017 election.
Based on media reports and feedback from political contacts, we would put the likelihood at around 25%, albeit subject to significant uncertainty.
She is expected to declare her intentions at a CDU leadership meeting on 21 November or at the party conference on 5-7 December. These dates should be given appropriate risk weightings. If the risk materialized, it would be bullish EUR/GBP in particular.
…..Why does it matter? In our view, Merkel has been an anchor for European stability. Any successor would either come with a more hawkish stance or potentially lack the gravitas to continue Merkel’s pragmatism. We see three market implications.
First, Schäuble in particular would likely take a harsher stance on Greece, ruling out further debt relief more explicitly and possibly lobbying against the ECB purchasing Greek government debt under QE. With Syriza hoping to tie the second review to promises of both, negotiations with Greece could escalate again in 2017.
Second, Schäuble would probably embolden hawks on the ECB council by raising the political pressure on the ECB to taper. Both factors would tend to be bullish EUR.
Third, in Merkel’s absence and irrespective of her successor, the Europeans would likely be less flexible in article 50 negotiations with the UK. Merkel’s political legacy is lined with compromises of the sort required for a ‘soft Brexit’. If she were not to run, she would be a lame duck by the time negotiations kicked off – bad news for those hoping for European leniency.
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