KUCHING: Analysts believe the ringgit could slip against the euro’s rise following Angela Merkel retaining her seat for the fourth time as German Chancellor as her coalition won 32.5 per cent of the votes, still remaining the largest parliamentary group.
Merkel’s biggest rival, Martin Schulz from SPD, garnered 20 per cent, a new post-war low.
Meanwhile, the far-right AfD party beat the odds and entered the parliament for the first time with a 13.5 per cent win. However, with SPD now becoming the biggest opposition party in the Bundestag, AfD’s presence may not be significant for long as it may suffer from political isolation like the Dutch Freedom Party.
“We believe the impact on the euro could likely be a brief initial sell-off against the US dollar,” explained analysts with AmBank Economics in a report yesterday. “The next move on the euro will depend on the sound bites, whether there is support for reflationary policies.”
The firm said the AfD party, which now secures 87 seats in the parliament, may hurt the shared currency in the near term especially with the SPD now becoming the biggest opposition party in the Bundestag.
Meanwhile, the European Central Bank (ECB) is expected to detail its Quantitative Easing (QE) tapering plan.
With the US Federal Reserve being hawkish about a rate hike, Ambank Economics said the upside to the euro may be limited, with the currency potentially trading sideways against the greenback, assuming the noise from North Korea is under control.
“Against the ringgit, we expect the downside to be around 0.2 per cent in the near term against the euro,” it added. “However, our assessment shows the ringgit could slip to a low of 5.08 against the euro by end-2017, driven by the euro fundamentals.
AmBank Economics’ full-year 2017 average of the ringgit is 4.89 against the euro.
“With the possibility of an alliance with the SPD rejected, Merkel’s options are narrow. The process of forming a new coalition could take months. It leaves Merkel to form a new coalition with the pro-business FDP.
“By forming a coalition with the FDP, the approval of bailout packages for Greece or other crisis-hit countries would be difficult. Besides, Merkel’s room to wiggle a Franco-German deal on integrating the euro zone’s finances more closely would be tight.
“However, all is not lost. The FDP is pro-business and wants to cut income tax by at least 30 million euros. This is a somewhat reflationary scenario. Furthermore, German criticism of the ultra-lose euro zone monetary policy would intensify.”