Euro shows resilience despite political uncertainty
Over the weekend, elections in France and Greece clearly suggested that voters are demanding less austerity and more growth. Risk aversion dominated market sentiment at the start of the week. Risky assets took a big hit, with the euro and commodity-linked currencies opening sharply lower, extending their declines following the US jobs report released last Friday.
Hollande wins French elections
In France, Hollande won the election as expected gathering 52 percent of the votes. He will be the first socialist to take over the Presidential Office in 17 years, in Europe’s second largest economy. With 48 percent of the votes, Nicolas Sarkozy became the first French president since Valerie Giscard d’Estaing in 1981 to fail to win re-election after his first term. The focus will now turn towards the general elections on the 10th and 17th June and whether the Socialist Party will be able to secure a majority or not. Hollande will take office on 16th May and will appoint a prime minister.
During his campaign, Hollande said he would call for an extraordinary parliamentary session starting early in July in order to push through a first reform package (finance bill, tax reform, banking sector reform, cancellation of the 1.6pp VAT hike scheduled for October). He is scheduled to meet with German Chancellor Merkel a day after he is sworn in. This highly anticipated meeting will be heavily scrutinized as Germany has already made it very clear, it does not intend to renegotiate fiscal agreements and give in to deficit reduction programs. Finance Minister Wolfgang Schaeuble said “the fiscal pact has been signed” and that Europe works along the principle of “pacta sunt servanda”, implying that agreements are honored and not renegotiated every time a government changes; Francois Hollande on the other hand is expected to push for a more growth-oriented policy.
Uncertainty surrounding Greece’s future
The Greek elections did not give any reasons of relief to global markets. This weekend’s election saw a sharp rise in popularity of parties opposing Greece’s conditions for the second EU/IMF bailout package. The two main parties, New Democracy and Pasok which have ruled the country for decades, did not achieve a combined majority, and as a result failed to form a coalition government. New Democracy leader Samaras had up to three days to forge together a coalition government, but gave up after a few hours on Monday. The right to do so was then passed to SYRIZA, the coalition of the radical left which came out as the second biggest party in the polls. Their leader Tsipras has vowed to cancel the EU bailout terms. Greece nevertheless has up to the 17th of May to form the new government. If they don’t, they will have to appoint a caretaker government until a new election takes place, probably in June.
Despite the Greek electorate’s vote against austerity, both the European Commission and the International Monetary Fund reiterated the obligation that Greece sticks to its austerity plans for more aid disbursements.
US NFP report misses consensus, raises expectations for QE3
Last Friday, the employment report from the United States for April showed the change in non-farm payrolls came in well below consensus at 115k versus 160k. Private payrolls were also lower at 130k versus 165k expected, and despite a falling unemployment rate, to 8.1 percent from 8.2 percent, this latest reading, highlighted the fact that the US economy was not able to create the required pace in job growth to spur economic growth and sustain the recovery. The latest figures undoubtedly provided more ammunition for dovish members rather than the hawks, and kept the door for more quantitative easing wide open.
Questions raised whether the Federal Reserve will ultimately revert to QE3 have kept dollar gains in check against the euro, despite the worrying political tensions and uncertainty surrounding Greece’s future within the currency bloc. EUR/USD started the week sharply lower and fell to a three and a half month low, by 1.2955. The single currency showed some signs of resilience as the threat of the Fed easing lingered and weighed on the greenback. It recovered to 1.3065 and was holding above 1.3000 by the time of writing. In the short-term, the 61.8 percent fibonacci level at 1.3050 in the wave from June 2010 lows to May 2011 highs will be decisive for further direction. A break below 1.2930 will be needed to confirm further downside, giving scope for a test of 1.2875. To the upside, the 100-day moving average at 1.3120 provides resistance, before 1.3180/90-area.
JPY favored by ‘safety’ bets
The Japanese yen is now again the favored currency while forex investors are in risk-off mode. USD/JPY risks are now tilted towards the downside, particularly in the absence of intervention threats. The pair fell to its lowest since February 21st by 79.65. It has so far failed to close below its 100-day moving average, now by 79.69, but a move lower could pave the way for further losses towards 79.00 or lower to its 200-day moving average by 78.41.
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