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Is the German election a game-changer for EUR?

Is the German election a game-changer for EUR? The German elections are set to take place on 26th September. After 16 years, Germany will see a new Chancellor. This poses the question as to whether there will be a shift in direction of German politics, which could then affect asset markets. Some mechanisms in which German policy can directly/ indirectly affect the EUR currency include –    

  • Fiscal stimulus, domestic demand - signs of further fiscal stimulus would likely be bullish for EUR (Citi analysts believe stimulus from potential coalitions range from 0.5%-2% GDP). A new government however may be limited in spending by the constitutional debt brake, which limits the structural federal government deficit to 0.35% of GDP and prohibits the states from running any structural deficits. Two-thirds majority in the Bundestag is required to make amendments to the constitution. But signs that there is both desire and ability from any German government to amend the debt brake would likely be positive for EUR.   

  • Capital flow to euro area (EA) assets - an increase in supply of Bunds from a looser fiscal stance could also lead to less debt outflows from the EA capital account and therefore positive for EUR. These outflows have effectively been forced abroad (into US Treasuries and alternatives) as there has been deficient supply of fixed income for EA investors thanks to tight fiscal policy and ECB QE. 

  • Eurozone stance - Germany’s European stance is probably neutral, although support from Germany towards more EA fiscal integration can be crucial to stabilizing periphery spreads and supportive for EUR at the margin.          


There are 4 possible coalition government combinations post-election and the impact on EUR will vary  

  • Traffic Light (SPD, Green, FDP) – the most likely option, as the SPD extend their lead to 25%, ahead of the CDU/CSU (~21), the Greens (17%) and the FDP (13%). This is a big change from just a few weeks ago when it looked like a contest between Greens and the CDU, only for both of their candidates to greatly stumble. As such, the SPD leader Olaf Scholz’s ratings are now far above everyone else's, including the CDU/CSU. An SPD aligned with the Greens and FDP would make a large public investment program and further European integration more likely, though by no means sure, as the FDP may be against large-scale spending programs and European initiatives. Additionally, the debt brake could still limit how much debt-financed investment such a government could provide, as changing the constitution would probably be out of reach. Given this, it’s unlikely that EUR/USD would materially appreciate. 
  • Kenya Coalition (SPD, CDU/CSU, Greens) - this would be slightly more to the left of the current government, but probably wouldn’t represent a significant shift in policy and may be marginally EURUSD positive but the market would want to see the potential for debt brake reform. 
  • R2G (SPD, Greens, Left) – the most positive for EUR. Such a government would probably seek a large-scale public investment program, financed as much as possible with new debt and seek more investment spending on EU level financed by more joint EU borrowing (Citi analysts estimate spending ~2% GDP).
  • Jamaica Coalition (CDU/CSU, Greens, FDP) -  a conservative coalition of CDU/CSU and FDP could be positively received on the stock markets due to its more market-oriented policies, but its strict fiscal ideas could cause a "European scare" on the bond markets. This government would bring ~1% GDP fiscal easing, and a focus on green investment, with some chance of deregulation in the labor market and is likely a more benign/ slightly softer scenario for EUR.         


Data releases: China - new TSF soars but PBoC expected to cut RRR by 50bp

  • Both M2 growth and loan growth in August fall short of market expectation - M2 growth continues to slow in August, sliding 0.1ppt  to 8.2%YoY and weaker than expectations for 8.4%. Meanwhile, new loans improve slightly in August to 1.22trn, vs. consensus for 1.4trn and previous 1.08trn though loan growth itself slows by 0.2ppt to 12.1%YoY.  But new TSF almost triples to RMB2.96trn, higher than consensus for RMB2.8trn with strong government bond issuance (RMB973.8bn in August vs. RMB182bn in July) and corporate bond issuance (RMB434.1bn vs. RMB295.9bn) leading the rebound of new TSF. Citi analysts expect PBoC will continue to maintain a cautious and flexible approach to policy while the August monetary data does not warrant further aggressive monetary policy easing, rising financial market stress, led by the uncertain outcome from the debt resolution of the second largest developer, could potentially lead to another 50bp RRR cut by year-end.   


Week Ahead         

  • USDUS August CPI MoM – Citi: 0.4%, median: 0.4%, prior: 0.5%; CPI YoY – Citi: 5.3%, median: 5.3%, prior: 5.4%; CPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 4.1%, median: 4.3%, prior: 4.3% - Citi analysts expect a 0.24%MoM increase in core CPI in August, rounding to 0.2%MoM but with risk of a stronger print that rounds to 0.3%. Services prices (shelter prices) will be the even more important components of hard inflation data to watch over the coming months and Citi analysts expect a solid 0.24% increase in primary rents and a 0.33% increase in owners’ equivalent rent in August. Other services prices will also be important to watch for signs of a tight labor market that has already resulted in a number a wage increases and could translate to upward pressure on consumer prices. 

  • USD: University of Michigan Consumer Sentiment – Citi: 73.9, median: 72.0, prior: 70.3; University of Michigan Inflation Expectations 1y – Citi: 4.7%, median: NA, prior: 4.6% - Citi analysts expect a moderate rebound in the University of Michigan consumer sentiment index to 73.9 in September after a sharp drop in confidence to 70.3 in August sparked by concerns of a renewed slowdown in activity. The drop in sentiment is likely in part related to elevated prices of many consumer goods. Inflation expectations components of the University of Michigan survey will also continue to be particularly important for the outlook for inflation. Citi analysts expect the 1-year ahead measure to rise slightly back to 4.7% although the 5-10 year expectations will be more important for the Fed         

  • USD: US August Retail Sales – Citi: -1.4%, median: -0.8%, prior: -1.1%; Retail Sales ex Auto – Citi: 0.1%, median: -0.2%, prior: -0.4%; Retail Sales ex Auto, Gas – Citi: 0.2%, median: -0.3%, prior: -0.7%; Retail Sales Control Group – Citi: 0.2%, median: -0.2%, prior: -1.0% - total retail sales should decline by 1.4%MoM in August with weakness led mostly by auto sales. Spending on other goods should be modest in August, and Citi analysts expect a 0.2% increase in control group retail sales after a 1% decline in July. Still, over the coming months, the team expects to see a further pullback in the very-elevated level of goods spending as services continue to normalize

  • GBP: UK jobs: Vacancies, June-August Forecast: 1,003k 3M/3M Prior: 657k 3M/3M; Employment, May-July Forecast: 147k 3M/3M Prior: 25k 3M/3M; Unemployment Rate, May-July Forecast: 4.5% 3M Avg Prior: 4.8% 3M Avg; Average Weekly Earnings, May-July Forecast: 8.2% 3M YY Prior: 8.8% 3M YY; AWE Ex-Bonus, May-July Forecast: 6.8% 3M YY Prior: 7.4% 3M YY – Citi analysts expect the UK labor market to deliver a further round of tight prints as vacancies continue to set new records, and unemployment falls back. However, with employment likely to remain 600-700k below pre-Covid levels, and 1.5 million either partially or fully furloughed in July, the team still expects labor market slack to remain quite significant.

  • NZD: NZ Q2 GDP Citi QoQ forecast; 1.0%, Previous; 1.6%; Citi YoY forecast; 15.9%, Previous; 2.4% strong contribution from the construction sector thanks to the hot housing market is expected to continue driving the solid growth momentum in NZ in Q2. Elsewhere, consumption will remain a key driver of growth, and services-orientated industries are likely to benefit from improved sentiment as the economy was open across Q2. Exports should be further boosted by the travel bubble with Australia. Overall, the solid growth trajectory of NZ’s economy prior to lockdowns should confirm that the RBNZ will probably maintain its hawkish rhetoric in the near term. However, Citi analysts still believe that the odds of a sharp tightening cycle are still low because of the ongoing uncertainty related to the pandemic. Therefore, the team only pencils in a 25bps rate hike in October, and no further hikes this year whereas markets now price no RBNZ rate hikes this year. 

  • AUD: Australian August Labor Force Survey; Citi employment change forecast;-175k, Previous; +2.2k, Citi unemployment rate forecast; 5.1%, Previous; 4.6%, Citi participation rate change forecast; 65.4%, Previous; 66.0% - the reference period for the August Labor Force Survey will encapsulate the lockdowns across NSW and VIC. Consequently, job growth is expected to decline significantly across the two states. Discounting the noisy monthly data, the two metrics more relevant for the state of the labor market are the number of hours worked across the economy, and the number of people employed but working less or zero hours for economic reasons. Overall, Citi analysts believe that the risk is that employment may not fall as sharply because stimulus payments could keep some workers attached to their job but the team still expects the unemployment rate to peak at around 5.4% later in the year as the economy reopens. 

  • CAD: Canadian CPI NSA MoM (Aug) - Citi: 0.1%, median: 0.1%, prior: 0.6%; CPI YoY – Citi: 4.0%, median: 3.9%, prior: 3.7% - Citi analysts  expect a 0.1% increase in headline CPI in August following a strong 0.6% jump in July. While this would be a more moderate increase in prices, it would be relatively stronger than the usual non-seasonally-adjusted price declines that typically happen in H2. However, a number of survey measures, including inflation expectations and the share of firms indicating difficulty meeting demand, suggest upside risks for core CPI. This may make BoC increasingly uncomfortable with a number of months of elevated core inflation.  


This is an extract from the Daily Currency Update, dated September 14, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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