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Normal Service to Resume?

Predictability making a comeback.

 

They may be polar opposites politically but Marine le Pen and Jeremy Corbyn are likely to share a common fate following the elections in the United Kingdom and France. With leads of 21% and 26% respectively, Emmanuel Macron and Theresa May look set for resounding victories.

 

There is a limit to how far reality can be stretched and future political historians will look upon Brexit, Trump and even Erdogan as anomalies within a system that is wholly predictable. It may be time to buy back those shares in polling firms we all sold. “Reports of their death”, as Mark Twain said, “are greatly exaggerated”.

 

Facing criticism from her father for not being sufficiently radical, Marine le Pen will slip quietly away, as France proves itself to be a “good European” after all.

 

Traders, who had seen a possible Le Pen victory as a material risk, are starting to believe that a Macron victory is almost certain. The Euro is beginning to build a base for a move through the psychologically important 1.1000 level against the dollar and even the ramifications of Brexit shouldn’t lead to a total collapse no matter the deal that is eventually struck.

 

As we move further into Q2 and traders become more accepting of risk, the Jpy could see further weakness and the Aud see buying interest. Buy Aud/Jpy? Now there’s a thought!

 

May Maintains Pressure

 

U.K. PM Theresa May has warned against complacency as she continues to deride the oppositions “seventh or eighth attempt at a coherent Brexit policy”. Politics in the U.K. has seemingly gone back thirty years although is anything traditional support for socialism has receded even more now than then. It is reported that there is a possibility that the Conservative party could see a majority in Wales for the first time in 100 years.

 

Mrs May’s contention that she sees a “coming together” of the country following the Brexit vote and the triggering of article 50 could be more than electioneering.

 

The effect on the pound of a 100+ seat majority would be positive but a 125/150 seat majority could see the pound at 1.40 and 0.7500 very quickly.

 

For now, the pound is holding onto the gains made against the dollar last week although against the Euro the pound is struggling to hold below 0.8600. The relief rally from the French election is the major factor in the relative strength of the single currency.

 

Central Banks to the fore.

 

A further driver of Euro strength is the possibility of a slightly more hawkish statement from the ECB following their meeting tomorrow. With activity indicators in positive territory and growing every month, there is a real feeling that monetary policy can be allowed to return to normality and an interest rate hike may not be too far away.

 

It is no longer fanciful to imagine Europe growing at near to, if not above trend. If that happens, a statue of Mario Draghi should be erected in Frankfurt and unveiled by Wolfgang Schäuble!

 

Before we wake up from that dream, the Bank of Japan will meet to discuss monetary policy. It would be hard to imagine a more predictable outcome but continued vigilance has allowed the Japanese economy to grow despite decades of close to zero inflation.

 

Dollar takes a back seat.

 

The nature of the FX market means that currencies are either proactive or reactive. For example, there is no new news to drive the dollar currently so its path is dictated by events in Paris or London. At times when events create activity for two currencies (e.g. EUR & GBP), that is when real volatility occurs.

 

Since the dollar is viewed as the world’s “reserve currency” the U.S. Treasury Secretary has a responsibility to maintain its value that is more figurative than actual. It has come to the notice of America after decades of “strong dollar strong America” rhetoric that, in fact, since it actually has to compete for its share of global trade a weak dollar is preferable.

 

Mnuchin and Trump seem to have agreed that a “weak dollar for now is preferable short term but we remain committed to a strong dollar…………eventually”

 

By: Alan Hill

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