Why the FX market couldn’t care less about German state elections – Commerzbank

Why should a currency trader in Connecticut or Singapore care how people in Saxony or Thuringia vote in regional elections? At first glance, this seems excessive. So it is not surprising at first sight that the foreign exchange market opened this morning with exactly the same levels of the euro at which trading ended on Friday, notes Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

German state elections are not yet moving the markets

“If you think a little further, it’s not so clear anymore. You don’t have to imagine a scenario of skepticism towards anti-EU parties in Germany becoming ever stronger (although it is likely that this will be gradually more convincing today than it was recently). Even now, in some political areas, the strengthening of these political movements is forcing established political parties – who fear further voter losses – to make concessions.”

“Therefore, one might rightly ask whether, in the hypothetical event of a new eurozone crisis, a German government would be willing to implement a bailout policy in 2010/12. Of course, a new crisis in the Eurozone is not currently in play. However, shouldn’t the lack of crisis-fighting mechanisms permanently increase the risk premium for EUR positions? And as long as the Bunds are the eurozone’s safe haven, there is almost no chance of a government bailout without German participation.”

“But we should bear in mind that in 2012 it was not the governments that finally succeeded in combating the crisis. The “whatever it takes” bailout was supposed to come from the ECB. It is the ECB that provides the guarantee that prevents a critical escalation of the sovereign bond market. And because his promise is credible, such crises do not even occur. As long as the currency market believes that this will not change even as the parties critical of the EU become stronger, it has no reason to revalue the euro because of some election results.”