Daily Market Brief 24 Apr 2017

Euro Rallies as France Votes for Change

April 24th: Highlights

  • Mainstream parties rebuffed
  • Macron and Le Pen face run-off
  • Euro makes five month high

France throws out the old guard

For the first time in sixty years the runoff for the French Presidency on May 7th will not be contested by one of the main centre-left or centre-right groupings.

In the end, following months of speculation, the French electorate voted for the two Candidates who had been front runners throughout the campaign. Emmanuel Macron who only formed his party a year ago gained 23.9% of the vote and Marine Le Pen 21.4%.

Francois Fillon and Jean-Luc Melenchon, the leaders of the old guard, both polled around 19%

On its opening in Asia, the Euro was immediately stronger, reaching 1.0940 as traders positioned for a stronger showing for Le Pen bought back their short positions. This was short lived and the commercial sell orders that have been in place for some time were filled.

The single currency fell back to trade at 1.0845, a 1.1% rise over Friday’s close. Against the pound, the Euro followed a similar pattern trading as high as 0.8505 before drifting back to 0.8480.

In the end the only surprise from the first ballot in France was that there was no surprise. After Brexit, Trump and Erdogan, the pollsters got it pretty much right.

Attention will now turn to May 7th. Left-winger Melenchon has already fired the first salvo by saying that since he has no mandate from his supporters to do so, he will not endorse either candidate and will therefore suggest they abstain from voting.

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U.K. Retail Sales in negative territory

Bank of England Governor Mark Carney, in Washington for the IMF meeting, has a habit of saying that he ignores “one-off” data releases and is more interested in trends.

On Friday, he had the opportunity to ignore a significant fall in retail sales. Following reasonably supportive numbers recently, retail sales fell by 1.8% in March contributing to a 1.7% fall year on year. Traders appeared to take on-board Mr. Carney’s opinions and the pound held onto the gains it had made following the announcement of a General Election on June 8th.

Over the week, the pound gained 2.35% on a dollar that was in reactive mode.

This week has a light calendar for data with preliminary Q1 GDP the primary release.

Commentators expect a rise of 0.4% compared with 0.7% in Q4’16. The year on year figure is likely to see a rise of 2.2% following 1.9% previously.

Central Banks dominate the week

The Bank of Japan will release its policy statement and interest rate decision early on Thursday morning. Emboldened by support from G7, despite criticism from the U.S., Japan will continue its ultra-easy monetary policy. It may even increase the “unusual measures” it has taken to ensure that the economy doesn’t fall into a deflationary spiral.

Trade dominates the Japanese economy. Its currency is driven by two major factors; trade and global risk. The Yen is benefits in times of global tension. Its low inflation economy acts as a store of value for overseas investors. The JPY has strengthened by a little over 5.75% so far in 2017 against a dollar which has seen its own share of verbal manipulation.

This is primarily due to safe-haven buying due to the continuing possibility of conflict in the Korean Peninsula.

The European Central bank also meets on Thursday and will also leave policy unchanged.

The ECB’s mandate is to manage monetary policy for the entire Eurozone so individual pockets of inflation or recession are ignored. This does, for example, Germany and Greece, no good at all. One wants higher rates and a stronger currency, The other, the exact opposite. In the end, the ECB “drives down the middle of the road” helping neither.

These are the joys of one size fits all!

This week’s events of note

Sunday / Monday
  • Eurozone: French Election – French Election.
  • North Korea: Possible Missile test – Increased volatility, JPY buying.

  • No major data releases

  • Australia: Inflation – Rates have bottomed. Data needs to point to increased economic activity before rates are raised.

  • Japan: Bank of Japan rate announcement – No change expected. Maybe a reiteration of global support for ultra-easy monetary policy.
  • Eurozone: ECB Rate Decision – No change to rates likely. A possibility of a withdrawal of asset purchases. This would see the Euro gain strength.
  • U.S.: Durable goods orders – Notoriously volatile data. Needs to be well outside expectation to have any effect on market.

  • U.K.: Preliminary Q1 GDP – Anything close to 2% YoY & 0.6%/0.7% MoM will lend support to GBP.
  • U.S.: Preliminary Q1 GDP – A read above 2% needed to see FOMC remain in rate hike mode.
  • All Markets, all week – Continued fallout from French election, U.K. election speeches and any North Korean military activity.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”