Angela Merkel defended her seat for the fourth time as German Chancellor as her conservative CDU/CSU coalition won 32.5% of the votes, still remaining the largest parliamentary group. Merkel’s biggest rival, Martin Schulz from SPD, garnered 20%, a new post-war low. Meanwhile, the far-right AfD beat the odds and entered the parliament for the first time with a 13.5% win. However, with SPD now becoming the biggest opposition party in the Bundestag, AfD’s presence may not be significant for long as it may suffer from political isolation like the Dutch Freedom Party. With the possibility of an alliance with the SPD rejected, Merkel's options are narrow. The process of forming a new coalition could take months. It leaves Merkel to form a new coalition with the pro-business FDP that may cause some roadblocks.

We believe the impact on the EUR could likely be a brief initial sell-off against the USD. The next move on the EUR will depend on the sound bites, whether there is support for reflationary policies. The AfD party, which now secures 87 seats in the parliament, may hurt the shared currency in the near term especially with the SPD now becoming the biggest opposition party in the Bundestag. AfD’s presence may not be significant for long as it may suffer from political isolation like the Dutch Freedom Party despite its strong gains.

Should that happen, we expect the EUR to rally. Meanwhile, the ECB is expected to detail the QE tapering plan. With the Fed being hawkish about a rate hike, the upside to the EUR may be limited, with the currency potentially trading sideways against the greenback, assuming the noise from North Korea is under control. Against the MYR, we expect the downside to be around 0.2% in the near term against the EUR. However, our assessment shows the MYR could slip to a low of 5.08 against the euro by end-2017, driven by the euro fundamentals. Our full-year 2017 average of MYR is 4.89 against the euro.

• Angela Merkel defended her seat for the fourth time as German Chancellor as her conservative CDU/CSU coalition won 32.5% of the votes, still remaining the largest parliamentary group. Merkel’s biggest rival, Martin Schulz from SPD, garnered 20%, a new post-war low. Meanwhile, the far-right AfD beat the odds and entered the parliament for the first time with a 13.5% win.

• With the possibility of an alliance with the SPD rejected, Merkel's options are narrow. The process of forming a new coalition could take months. It leaves Merkel to form a new coalition with the pro-business FDP. By forming a coalition with the FDP, the approval of bailout packages for Greece or other crisis-hit countries would be difficult. Besides, Merkel’s room to wiggle a Franco-German deal on integrating the euro zone’s finances more closely would be tight.

• However, all is not lost. The FDP is pro-business and wants to cut income tax by at least €30 million. This is a somewhat reflationary scenario. Furthermore, German criticism of the ultra-lose euro zone monetary policy would intensify.

• Impact on the EUR in our view could likely be a brief initial sell-off against the USD. The next move on the EUR will depend on the sound bites, whether there is support for reflationary policies. The AfD party, which now secures 87 seats in the parliament, may hurt the shared currency in the near term. With the SPD now becoming the biggest opposition party in the Bundestag, AfD’s presence may not be significant for long as it may suffer from political isolation like the Dutch Freedom Party despite its strong gains.

• Should that happen, we expect the EUR to rally. Meanwhile, the ECB is expected to detail the QE tapering plan. With the Fed being hawkish about a rate hike, the upside to the EUR may be limited, with the currency potentially trading sideways against the greenback, assuming the noise from North Korea is under control. Against the MYR, we expect the downside to be around 0.2% in the near term against the EUR. However, our assessment shows the MYR could slip to a low of 5.08 against the euro by end-2017, driven by the euro fundamentals. Our full-year 2017 average of MYR is 4.89 against the euro.

Source: AmInvest Research - 25 Sept 2017