Grand Coalition to Take Shape in Germany

The days of strong German leadership from Angela Merkel may be over as her coalition failed to win a majority. The euro took the news in stride and there have been minimal moves to start the week. Japan is on holiday but Chinese markets re-open after several days of holidays.

Merkel's party produced a much-stronger-than-expected result in German election, securing 42% of the vote. Unfortunately, a large portion of the strength came at the expense of her coalition party, which did not reach the 5% threshold to enter parliament.

The anti-euro party also narrowly missed the threshold but it will take some time to determine for sure. Alone, Merkel's party will be very close to a majority but governing with a 1 or 2 seat majority in the 600-person parliament is a difficult proposition so Merkel will likely have to forge a grand coalition.

As details of a coalition become clear the euro could react but for now the market is sanguine. Down the road, however, softer leadership could undercut German negotiating positions in a fractured Europe.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR +32K vs +12K prior JPY -89K vs -95K prior GBP -6K vs -38K prior AUD -27K vs -60K prior CAD -19K vs -31K prior CHF +1K vs 0K prior NZD +5K vs flat prior US Dollar Index longs at 22K vs 21K prior

The positioning numbers add some insight into the outsize AUD and GBP strength over the past two weeks. Shorts have been scrambling to the exits, squeezing those pairs higher than they might have otherwise climbed.