The primary headline of Angela Merkel winning a historic fourth term is the one that will likely drive market activity. Despite disappointment over lost votes from CDU/CSU and SPD, the rise of right wing populist AfD and questions over the exact government make-up, the outcome of yesterday Bundestag elections will be pro-Europe, centrist, coalition government. Yes, there are granular uncertainties which will delay Germany’s role in great EU integration, but Merkel has indicated that a coalition agreement should be reached by Christmas. EUR/USD reacting calmly, with marginal USD strength, but trading well within its recent ranges. A EUR/CHF move higher indicates that the overall result of the German election is broadly pro-Euro.
Moving forward, given the decline of popularity in the SPD the most likely coalition under Merkel would be CDU/FDP/Greens. Already we are hearing a reversal of FDP language post-election sounding pro-Europe. While the Greens in the past have call for Euro-bonds, which would solve many of the uncertainty around EU funding. If you take the results of yesterday's German election and combine them with French President Macron's EU reform vision, this is a positive political backdrop for European investors.
For the first time in a long while, European politics is likely to drive the euro higher. There are risks in the horizon with Macron's falling popularity rating and weakness of the party in Senate elections, Italian elections and Spain/Catalonia (significant risk escalation, in our view, as Madrid moved to take over local policing). But in the near term, we would manifest our strong Europe view through long EURCHF on any pullbacks.