Optimism amongst investors following the U.S. election on November 8 is being questioned as recent developments show the U.S. President is more focused on protectionist measures than policies to boost economic growth. This also applies to Europe after France’s Marine Le Pen launched her presidential campaign, promising to dump the euro, fight globalisation and close the borders on immigrants.
What’s more interesting, Francois Fillon who just few weeks ago, seemed to be winning the presidential race is falling well behind in most recent polls after being accused of paying his wife and children hundreds of thousands of euros for jobs they did not do.
Investors who failed to predict the outcome of the biggest two political events, the U.S. elections and Brexit vote, started considering the high likelihood of Le Pen winning the French elections. This is reflecting in fixed income markets, as French bond yield rose to its highest levels since July 2015, and the spread between the French 10-year bonds and the German Bunds widened to 0.78% which was last seen in November 2012.
These developments are dragging EUR/USD lower for a second consecutive day, and Mr. Draghi who defended on Monday the ECB’s QE program and fired back on the accusations by Peter Navarro that Germany is using a "grossly undervalued" euro, didn’t help the single currency either.
Political risks in the euro area will likely continue to overshadow economic data in the weeks ahead. The French election is not the only risk factor. Dutch, German, and possibly Italian elections will continue to weigh on the euro.
The yen is becoming the major beneficiary of the most recent developments. USD/JPY has declined by more than 5.7% from January highs and since BoJ will not likely take any new actions after the central bank extended buying 10-year bonds we may see further appreciation in the yen, possibly hitting 110 if equity markets continued to decline.
Investors fell in love with gold again for same reasons after being dumped in November through mid-December last year. Rising political risks on both sides of the Atlantic will continue to support the yellow metal, but how further it may shine depends on real interest rates and the USD direction.
A widely ignored economic figure during Obama’s era will be one of the most interesting releases going forward. The U.S. trade balance which is due to release later today will attract lot of attention, and I don’t rule out a tweet from Trump after the U.S. shows a deficit close to $45 billion. Whether he’s going to attack China, Germany, Japan or Mexico for being the winners in this trade relation will remain to be seen.
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