FX Update: Long yields suddenly make their presence felt again.

German election dead ahead Will cover this issue more in detail on Monday, but have a listen to today’s Saxo Market Call podcast for a partial discussion on the likely outcome and the potential difficulties in forming a majority ruling coalition in the wake of the German election. Since the advent of the AfD and its 10+% result in the polls in 2017 and a likely similar result tomorrow, majority coalitions are tough to build when neither side of the center is willing to consider working with the AfD. The “stoplight” coalition idea is much discussed, but the “yellow” FDP has a traditional liberal/supply side focused platform that looks incoherent compared to the Red/Green focus on higher wages and significant fiscal outlays.

In terms of how to trade the German election, the likely difficulty in forming a ruling coalition could make this a slow burn issue for months, but EURCHF upside optionality is still fairly inexpensive at 4.25% implied volatility for 3-month tenors if we get a surprisingly strong result and mandate for the Greens/Reds and a repricing much higher of EURCHF in the weeks and months to come.

Crunch time for debt ceiling and key US fiscal packages starting next week. The situation is simply too complex to reduce to a few lines here, but the basic outline is that some progressive Democrats are engaging in brinksmanship over the smaller, bipartisan $1 trillion infrastructure bill passed by the Senate but not yet by the House.Progressive Democratic House members have declared they will not vote in favour of the infrastructure deal unless the progressive $3.5 trillion (spread over 10 years) mostly climate- and social spending bill is tied to the infrastructure deal. In other words, the risk is of a failure of both bills and a complete failure of the domestic Biden agenda, with the kicker that the Republicans could retake the house in mid-term elections next fall. Meanwhile, the debt ceiling issue has not been addressed, with the US treasury needing to enact emergency measures after September 30 (end of the budget year next Thursday) if no stop-gap funding bill is passed and a theoretical default possible “some time in October” according to US Treasury Secretary Yellen if nothing is done. Of course something will be done, but a government shutdown and a shadow over the markets could result from this nonetheless in coming weeks.

Table: FX Board of G10 and CNH trend evolution and strength
Note the pickup in NOK and GBP after respective central bank meetings, although from the Norwegian yield curve reaction, most of the message was in the price so NOK will quickly revert to tracking risk sentiment and energy prices. The momentum reading for JPY for the last two days is a stunning -3.6, quite a jolt.

Table: FX Board Trend Scoreboard for individual pairs
Oddly, EURCHF still sucking wind despite the big yield moves yesterday – is that hedging the German election? Could see significant volatility in that pair next week – would prefer long upside volatility there. Elsewhere, note additional JPY crosses already changing direction back to the upside, including NZDJPY, SEKJPY and CADJPY if these close near current levels today.

Upcoming Economic Calendar Highlights (all times GMT)

• 1245 – US Fed’s Mester to speak on economic outlook
• 1315 – ECB’s Lane to Speak
• 1400 – US Aug. New Home Sales
• 1400 – US Fed’s Powell, Clarida to speak
• 1405 – US Fed’s George (non-voter) to speak