In Dramatic Rebound, Euro, DAX Recover All Losses; “Is Strong Government Overrated?”

Having tumbled 80 pips to a one week low in kneejerk response to the late Sunday news that Angela Merkel had failed to form a government following the collapse of the “Jamaica Coalition” talks – when the Free Democratic Party walked out, saying the differences with the Green party were too great to bridge – both the Euro and European stocks have staged an impressive rebound, and the entire gap lower in the FX pair has now been, well, pared.

Alongside the rebound in the EURSD, the German DAX, which earlier fell as much as 0.5% at the open (and whose futures at one point overnight looked set for a 1% drop), trims early losses and briefly even turns positive, on what some have speculated was another round of central bank intervention.

As Bloomberg notes, while analysts contemplated possible scenarios of Merkel setting up a minority government headed by her Christian Democratic-led bloc or asking President Frank-Walter Steinmeier to order a fresh national election, “leveraged and interbank names were quick to fade the euro’s dip that stretched as much as 0.6% to 1.1722.

In other words, the CTA momentum chasers came, saw, and BTFD.

As a result, the euro briefly moved above 1.1800 to touch day high of 1.1812 as short-term names were stopped on the move above 1.1780, traders in London and Europe told Bloomberg. Meanwhile, BBG adds, option gauges – volatility term structure, smile, butterflies – pointed to a non-lasting effect of the German news, with market focus turning to speeches by ECB policymakers including Draghi, Constancio and Nowotny.

And while every analyst – who had previously been wrong about the direction in the EURUSD over 2017, had hot takes to explain why Germany is fine even if Merkel is forced to hold a new government elections, something that has never happened before – the common response boiled down to one argument: the German economy us strong enough to offset political uncertainty after government talks collapse.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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