Euro not frightened of Merkel's warning

Angela Merkel signals that she could opt for a new public vote. This however has not caused as much market disturbance as one would assume. Jeremy Stretch, Head of G10 FX for CIBC takes us through the situation and why the markets are acting as they are.

The announcement did indeed catch the markets off guard. At the start of the year markets were terrified by political uncertainty. The French and Dutch elections particular highlights. However after those elections, the markets relaxed and assumed that the German elections would be very dull. 

But 6 weeks on from the election, and there is no government in place. There is increasing speculation that there could be another vote in March or April, therefore any subsequent negotiations would create a political vacuum. Consequently this has taken Euro lower, but not any substantial moves lower. 

Markets assume that there will be some form of resolution. We are not in a situation where we will see her lose power yet. But the markets are beginning to consider Merkel stepping back sooner than anticipated. Ultimately it is not a situation where the political risks are so large that investors are running away yet. 

This will be a situation that the market will continue to monitor for a while. Granted, if there were to be a situation where she steps down then that would be a paradigm. The markets interpretation of the Eurozone is Merkel at the top. Standing as the bastion of stability and keeping it all together.

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