Euro Suffers on Le Pen Fears

French election campaign hots up

There is a definite fear in the market over the “rolling back” of globalisation. Populists politicians like Le Pen and Trump are using fears over further job exports to further their campaigns.

Fears of a French lurch to the right drove the Euro lower yesterday as National Front Candidate Marine Le Pen outlined a plan to fight globalisation and take France out of the single currency.

Germany is becoming more isolated within the Eurozone as its economic requirements differ so markedly from those of its partners. Mario Draghi, the President of the European Central Bank, is faced with a dilemma through the rest of this year – the Germans will not want a further fall in the Euro but political events may leave them with no choice but to accept the reality of tying their economy to historically weaker countries.

The German economy is on a par with the U.S. in seeing growth and signs of inflation growing. The U.S has already moved on rates and will again, probably twice this year. The overall neutral jobs report in on Friday may have pushed back the next hike until the end of Q2 but Germany would like to be able to tweak rates, just a little, to ward off inflation fears but has no chance within the rigid Eurozone framework.

The French election is the first of three in Europe this year being followed by The Netherlands and Germany and the Dutch election will feature another firebrand right wing populist, Geert Wilders.

Wilders is fiercely critical of the EU’s policy of allowing an almost unfettered influx of refugees and migrants. Wilders has campaigned to stop what he views as the “Islamisation of the Netherlands”. He has compared the Quran to Mein Kampf and has campaigned to have the book banned in the Netherlands. He advocates ending immigration from Muslim countries, and supports banning the construction of new mosques. Wilders and Trump; a marriage made in heaven?

It remains to be seen how his populist are viewed once the election campaign gets into full flow but JP Morgan predicted yesterday in a note to investors that the Euro would quickly fall below parity were there to be a Le Pen victory in France.

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Brexit bill meanders through Parliament

Sterling suffered slightly yesterday as Parliament began debating the Brexit Bill presented by the Government last week.

At the start of the three day debate, the Prime Minister warned against ignoring the will of the people by trying to either produce a watered down “soft Brexit” set of terms or attempting to keep Britain in the EU in some way and she reiterated her ‘no deal rather than a bad deal’ rhetoric to warn of her Government’s intentions.

Japanese Yen gains “safe haven flows”

The Japanese Yen and the Swiss Franc have long been seen by traders as ‘safe haven’ currencies. They are usually the ones that rise in times of market stress. The Yen has risen by 4.5% so far this year against the dollar and since making a high around 123.50 in late January the Euro has fallen to close to 119.50.

An old friend of the currency markets, Eisuke Sakakibara, in comments yesterday, said he felt the JPY could trade below 100 to the dollar as Trumps currency manipulation rhetoric slowed the pace of U.S. interest rate hikes.

In the 90’s Sakakibara was know as “Mr. Yen”. He was Japan’s Currency Czar, initiating the policy whereby the Bank of Japan would intervene in the currency markets to weaken the Yen.

The last intervention by the Bank of Japan was in 2011. I can imagine President Trump blowing a gasket if there was physical intervention in the market nowadays to weaken a currency!

Trade Data could reignite Trump’s Ire

The release of trade data for the U.S. later today could be the catalyst for further pronouncements on currency manipulation from President Trump.

A trade deficit of around $45bn is expected. This release has lost its importance over the past few years as markets accepted that the U.S. sucked in imports as it sent manufacturing overseas. However that could all change as Trump attempts to reverse that trend and attempt to make U.S. manufacturing competitive again. Good luck with that, Donald!