Citi has highlighted the potential for increased political risk in Europe as German regional elections begin on September 1. According to the Citi Economics Europe report, the elections could lead to major shifts in regional politics, potentially destabilizing the national coalition, changing national fiscal policies, and reorienting Germany’s policies within the EU and internationally.
Financial markets have shown increased sensitivity to election-related risks this year. Similar events, such as the recent French elections, have previously impacted the euro, causing the US dollar and the euro to depreciate, in line with the widening spread.
These developments suggest that the upcoming German elections could also trigger market volatility, particularly affecting foreign exchange rates.
Citi analysis suggests that uncertainty surrounding the election outcome may coincide with a seasonally stronger US dollar and increased volatility in the run-up to the US election.
The company notes that the DXY, an index that measures the strength of the dollar against a basket of currencies, continues to find support, while there is already a trend of leveraged positions short on the US dollar and long on the euro.
In light of these factors, Citigroup maintains a cautious stance on the euro and is defensive against potential risks. The company remains short on the euro through a two-month EUR/USD put option at a strike price of 1.08 (reference spot price of 1.1121 as of 9:16 a.m. ET, August 28) and maintains a short position in the spot market (reference spot price of 0.8413 as of 9:16 a.m. ET, August 28).
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