French concerns drive Euro lower

Yesterday’s opinion poll in France suggested that the underlying view, that Marine Le Pen would win the first round of voting but would be beaten by her centre right opponents, is not as certain as had been assumed.

The gap between the interest rate of German and French bonds rose to its highest level since 2012. This is significant as it is a measure of the stresses seen intra-Eurozone as a proxy for the French election result.

Currency positive developments in the U.K. and U.S. also drove the single currency lower. In the U.K. the start of the Brexit debate in the Upper House led observers to believe that the Lords may delay the triggering of Article 50. This short-termism has plagued the pound since the referendum result as traders cling to a (false) hope that somehow the will of the people will be ignored and their (also false) mantra of “Hard Brexit bad soft Brexit good”.

It is clear that within the EU they have no idea how to deal with unforeseen threats to countries membership of the EU Experiment. They tried to play hard ball with Cameron and he held firm in his threat and asked the people to decide. There is a real danger that in the Brexit negotiations there mayl be more brinkmanship and “noses cut off to spite faces”, which will be just as serious for the Euro as for the pound.

The EU does not know how to bridge the gap between its own governing body and its sovereign nation members. They are wary of trying to influence individual country’s internal affairs relying on a view that everyone shares the belief that the EU is a good thing.

Another row is brewing between Westminster and Edinburgh with the Minister responsible for Scotland within the British Government set to tell the Scottish Parliament that “independent or not, Scotland is leaving the EU”. That is sure to raise tensions but it illustrates plainly the inability of Scotland to survive as a wholly independent nation not being a member of the U.K. or EU.

Yesterday, hawkish rate comments by two FOMC members saw the dollar rise against its major trading partners by 0.75%. Today sees the release of the minutes of the last FOMC meeting in the U.S. This was the first meeting following the hike in rates and traders will be keen to see how the effective the tightening of monetary policy has been.

One FOMC member already stated yesterday that she would be comfortable with a further hike, while another would also support a further hike next month provided data releases between now and then supported such a move. That is an exercise in stating the obvious but the nature of the market is such that FOMC members must be listened to and revered.

In Japan the Governor of the Bank of Japan confirmed that the chance of a further easing of monetary policy was “low for now”. His comment was backed by the Finance Minister who backed market expectations that Japan was “not considering issuing negative rate Government bonds in the near future”. The Yen rose but until monetary policy in Japan pushes rates into positive territory the currency will remain weak.

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