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Euro, NZ dollar both sideswiped by political uncertainty

9/25/2017, 10:30:36 AMBasics of Trading
Euro, NZ dollar both sideswiped by political uncertainty

The euro slipped in early Asian trading on Monday after Germany's election showed surging support for a far-right party that left Chancellor Angela Merkel scrambling to form a governing coalition.

The euro was trading down 0.3 percent at $1.1922 and could test support around $1.1860 as liquidity picked up through the session.

Merkel did win a fourth term in office on Sunday but will have to build an uneasy coalition to form a government after her conservatives haemorrhaged support in the face of a surge by the anti-immigration Alternative for Germany (AfD).

Despite winning the most votes, Merkel's bloc slumped to its worst result since 1949 and her current Social Democrat coalition partners said they would go into opposition after tumbling to 20.7 percent in projections, a post-war low.

"Probably the most significant announcement following the election was that the current junior coalition partner, SPD, immediately announced it would go into opposition," said Peter Schaffrik, global macro strategist at RBC Europe in London.

"With the withdrawal (from a grand coalition) by the SPD, we think the only realistic option left is a coalition of Merkel's CDU/CSU, the Free Democrats (FDP) and the Greens - dubbed 'Jamaica coalition - due to the colors of the three blocks (black/yellow/green)," he added.

Political uncertainty also took a toll on the New Zealand dollar after no single party won a majority in an election over the weekend.

The New Zealand currency dropped 0.7 percent to $0.7285, though it found chart support at $0.7280 for now.

The ruling National Party won the largest number votes in the election, but neither of the major parties won enough seats to gain a majority in parliament, forcing a round of coalition building that could last days or weeks

Sterling was steady for the moment at $1.3486 after falling on Friday when ratings agency Moody's downgraded Britain's credit rating, saying government plans to bring down debt had been knocked off course and Brexit would weigh on the economy.

A few hours after Prime Minister Theresa May set out plans for new ties with the European Union, Moody's cut the rating to Aa2, underscoring the economic risks that leaving the bloc poses for the world's fifth-biggest economy.

May failed to give any concrete details for how Britain might retain preferential access to Europe's single market in her speech.

The yen weakened 0.4 percent to 112.36 yen per dollar, helped by renewed hope for Prime Minister Shinzo Abe's economic stimulus as he is expected to announce a snap election, to be held on October 22.

A weekend survey by the Nikkei business daily showed 44 percent of voters planned to vote for Abe's Liberal Democratic Party (LDP) versus 8 percent for the main opposition Democratic Party.

"It's easier for traders to start the week by selling the yen given expected resolution of the parliament and so on. But I would suspect a lot of election related stuff is already priced in and the yen would have limited downside," said Kyosuke Suzuki, director of foreign exchange at Societe Generale (PA:SOGN) in Tokyo