Brexit, Trump…is Le Pen the Third Outlier?

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Some say the idea that things happen in threes comes from Macbeth, a tragedy written by Shakespeare, “Thrice Mine and Thrice Thine…” Far be it for us to comment on the link between a 400 year old play of greed, ambition and lust for power and the three political events above. What is interesting are the current moves which are quietly occurring in some markets which could act as a harbinger of more volatility to come.

The European economy has been surprising most estimates this year in a widespread show of positivity. ‘Finally!’ some might say, after what is now close to a decade after the financial crisis kicked off. Business sentiment, job creation and single digit unemployment are generally at multi-month records. Indeed, fourth quarter Eurozone growth last year was estimated to be faster than the U.S. However, looming over this is the full calendar of European elections scheduled for this year with the most immediate being when French voters go to the polls in May.

With Marine Le Pen outlining her manifesto over the weekend, one of the most unpredictable presidential elections in decades has caused investors to dump French debt, sparking a four year high in spreads over the safe haven German 10 year bond. Seemingly we now have a situation where the only candidate sure to make the second round where voters get their say, is Le Pen. Similarly, UBS Wealth Management give Le Pen a 40% chance of becoming the next President.

With these moves in bond spreads reminding us of the swings seen during the Eurozone debt crisis, we have also seen moves in the single currency.  EUR/CHF has now dropped to levels where traders are mindful of SNB intervention. EUR/USD, most importantly, has resumed its long-term downtrend. This pair bounced a number of times below 1.04 around the new year, creating a 14 year low of 1.0341, but the well-defined bull channel did not convincingly break above 1.08.

This barrier, paired with increasing political risks and renewed Greek debt warnings means it probably pays to be bearish on EUR rallies. The January rebound could be no more than a retest of long-term resistance so we will let the Eurozone political roadshow take its course and be our guide.

EUR/USD Daily Candle Chart

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