French elections: Marine Le Pen pushes Frexit envelope
(Yann Quelenn, market analyst)
The French elections will be one of the most volatile topics in the first half of this year. As we count down towards 23rd April, the outcome is currently anyone’s guess. Francois Fillon’s race has been seriously disrupted as he contends with recent embezzlement allegations, while the likelihood of a win for Benoit Hamon, the Socialist candidate is increasingly bleak. At the moment Marine Le Pen is still topping the polls and she is now using this momentum to drive the agenda of a "Frexit" referendum.
Timing-wise, the pushing of this agenda could not be better for Le Pen. It has now been eight months since the Brexit result and the promised nightmarish scenario has not yet materialised. British economic data is on the rise, the devaluation of the pound is a strong point for exports and it also has taken some pressure off the BoE.
Recently, ECB member Benoit Coeuré stated that French people do not want to exit the Eurozone. However, Draghi has previously said that an exit from the EU is possible if a country pays off its “bill”.
We believe that there is definitely room for further euro weakness in the medium-term, so hold on tight! The currency war against the greenback, which Trump considers overvalued, should accelerate.
NZD holds ground as USD takes off
(Arnaud Masset, market analyst)
The New Zealand dollar over performed against all of its G10 peers on Tuesday amid an unexpected jump in inflation expectations. Inflation expectations 2-year ahead rose to 1.92%y/y compared to 1.68% in the December report. Similarly, the 1-year ahead measure climbed to 1.56% from 1.29%. The solid pick-up in commodity prices that was initiated early last year is one of the main reasons behind this substantial shift in expectations. Gross national product growth was also boosted to the upside as the survey respondents now expect a 3.11% expansion in two years’ time compared to 2.75% three months ago.
All in all, the solid growth expectations, combined with higher inflation, considerably reduce the likelihood of another rate cut from the Reserve Bank of New Zealand, which had the result of lifting the currency to $0.7376. However, the broad USD rally that has rattled FX markets this morning has evaporated these gains. The currency pair fell below its US session closing price of 0.7320, sliding as low as 0.7291. We maintain our positive bias on the currency pair as the export driven country should continue to take advantage of the stabilisation in commodity prices. The $0.75 level will nevertheless remain a solid resistance that will require more than a short-term weakness in the dollar.