Forex Today: EUR wilts as German "Jamaica" talks collapse, risk barometer hits 5-month low

Forex today saw the common currency take a beating against majors as Chancellor Merkel is left facing the prospect of forming minority government – or fresh elections following the collapse of the "Jamaica" (coalition) talks.

The EUR/USD pair fell below the 100-day moving average (MA) even though the US Treasury yield curve or the spread between the 10-year yield and the 2-year yield narrowed to a fresh decade low of 60.5 basis points. Either the political uncertainty is overshadowing the curve flattening or the latter is the result of increased haven demand for long duration treasuries.

Also worth noting is the decline in the AUD/JPY to 84.50; the lowest level since Jun. 26. Often considered as the global risk barometer, the drop in the AUD/JPY indicates the risk assets are likely to remain under pressure in Europe and America.

The USD/JPY pair fell in line with the decline in the 10-year treasury yield, but the downside is being capped around 111.90 - 38.2% Fibonacci retracement of Aug low-Nov high. Meanwhile, GBP/USD fell to 5-day MA level of 1.3189 before recovering partially to 1.32 levels. Cable remains at the mercy of the Brexit related newsflow.

Elsewhere, gold backed-off from a one-month high of $1297 to $1292, still looks set to scale $1300 as suggested by the Bollinger band bullish breakout.

Main news in Asia

UK PM to get support on Brexit divorce bill - FT

Merkel running out of options as FDP walk out of four-party coalition agreement talks

Germany's Merkel - Will communicate failure of coalition talks to President

Japanese exports continue the best YTD performance since the 2008 crisis

Chinese demand for Australian residential property has eased - RBA's Kearns

Focus on German politics & equities

There is widespread belief that Merkel's paralyzed may force the EU to "put major decisions" on hold. Thus, there is little chance that trade talks as desired by UK PM Theresa May will get underway before there is a government in Germany. This bad news not only for the EUR but also for the GBP. The FX markets could also take cues from equities. As suggested by the drop in the AUD/JPY, the equities may have a tough time today, in which case the EUR and GBP may wilt further and the Treasury yield could continue to flatten (on increased haven demand for 10-year treasuries).

EUR/USD - Its flattening T-yield curve vs. German political uncertainty

GBP/USD - 1.3025/1.3340 range holds, focus on Brexit & yield differential

EUR/GBP - German news accentuates the impact of 'shooting star'