French Support of Eurozone Reaches Multi-Year Highs: Euro Currency Demand to Remain Firm

french ez support 070517

The sentiment tide has turned favorable for the euro.

The types of existential threats which hampered the euro currency during the European debt crisis have largely receded for the time being.  EU citizens do not seem particularly interested in following the UK down the path of currency devaluation, inflation, and political turmoil by leaving the eurozone.

Demand for the single market currency will remain firm as the European economy continues its stable trajectory and the initial consequences of Brexit serve as a deterrent to others.

Longer term, we do expect to see perceptions improve regarding the decision by the UK to leave the European Union as the UK economy re-balances and the worst fears are not realized. Life will go on for Britons. There will eventually be appreciation for the modest claw back of British sovereignty, though the UK and EU will remain close economic allies out of geographic proximity and necessity.

French Elections This Weekend Unlikely to Produce Destabilizing Outcome

  • Out-sized market attention has been placed on the French general election this weekend on Sunday, April 23. This is due to the significant geopolitical risk posed by one of the more extreme candidates destabilizing Europe should they somehow pull off an upset victory.
  • This risk is far overblown. Populist right victories in 2016 by the UK Brexit campaign and Donald Trump created a misplaced fear bias for something similar happening in France or elsewhere in Europe. Trust in political polling is understandably low.
  • While the first round election on April 23 is somewhat of a close call, the second round runoff on May 7 will not be. The margin of error for Emmanual Macron (Independent) beating Marine Le Pen (Front National) or Jean-Luc Mélenchon (Unbowed France) in the second round is more than 20 points. That is far beyond the margin of error at this time before both the UK referendum and US presidential election. Not even close.
  • The main risk to keep an eye on at this point is both Le Pen and Mélenchon beating out the field in the first round of elections this weekend, meaning one of them would be the ultimate victor after round 2 since the threat of one of the more mainstream candidates would be removed. Stranger things have happened, but the probability of this is perhaps about 10%.
  • If the first round results indicate almost any outcome other than that posed by the point above, the euro should rally, French bonds should recover, and a global equity relief rally should ensue early next week, all else equal. It is difficult to support the opposing view with 10% odds at best per my analysis.

french polls 042117