Euro shows resilience despite political uncertainty

Over the weekend, elections in France and Greece clearly suggested that voters are demanding less austerity and more growth. Risk aversion dominated market sentiment at the start of the week. Risky assets took a big hit, with the euro and commodity-linked currencies opening sharply lower, extending their declines following the US jobs report released last Friday.

In France, François Hollande won the election as expected, gathering 51.62 per cent of the votes. He will be the first Socialist to take over the presidential office in 17 years, in Europe’s second largest economy. With 48.38 per cent of the votes, Nicolas Sarkozy became the first French President since Valerie Giscard d’Estaing in 1981 to fail to win re-election after his first term. The focus will now turn towards the general elections on June 10 and 17 and whether the Socialist Party will be able to secure a parliamentary majority or not. Mr Hollande will take office on Tuesday and will appoint a prime minister. During his campaign, Mr Hollande said he would call for an extraordinary parliamentary session starting early in July to push through a first reform package (finance bill, tax reform, banking sector reform, cancellation of the 1.6 per cent VAT hike scheduled for October). He is scheduled to meet German Chancellor Angela Merkel a day after he is sworn in. This highly anticipated meeting will be heavily scrutinised as Germany has already made it very clear that it does not intend to renegotiate fiscal agreements and give in to deficit reduction programmes.

German Finance Minister Wolfgang Schaeuble said: “The fiscal pact has been signed” and that Europe works along the principle of “pacta sunt servanda”, implying that agreements are honoured and not renegotiated every time a government changes. François Hollande, on the other hand, is expected to push for a more growth-oriented policy.

The Greek elections did not give global markets any reasons for relief. This weekend’s election saw a sharp rise in popularity of parties opposing Greece’s conditions for the second EU/IMF bailout package. The two main parties, New Democracy and Pasok, which have ruled the country for decades, did not achieve a combined majority, and as a result failed to form a coalition government. New Democracy leader Antonis Samaras had up to three days to forge a coalition government, but gave up after a few hours on Monday. The right to do so was then passed to SYRIZA, the coalition of the radical left which emerged as the second biggest party in the polls. Their leader Alexis Tsipras has vowed to cancel the EU bailout terms.

Greeks nevertheless have up to May 17 to form the new government. If they don’t, they will have to appoint a caretaker government until new elections take place, probably in June. Despite the Greek electorate’s vote against austerity, both the European Commission and the International Monetary Fund reiterated the obligation that Greece sticks to its austerity plans for more aid disbursements.

Last Friday, the employment report from the United States for April showed the change in non-farm payrolls came in well below consensus at 115,000 versus 160,000. Private payrolls were also lower at 130,000 versus 165,000 expected, and despite a falling unemployment rate, to 8.1 per cent from 8.2 per cent, this latest reading highlighted that the US economy was not able to create the required pace in job growth to spur economic growth and sustain the recovery. The latest figures undoubtedly provided more ammunition for dovish members rather than the hawks, and kept the door for more quantitative easing wide open.

Questions raised on whether the Federal Reserve will ultimately resort to QE3 have kept dollar gains in check against the euro, despite the worrying political tensions and uncertainty surrounding Greece’s future within the currency bloc. EUR/USD started the week sharply lower and fell to a three and a half month low, by 1.2955. The single currency showed some signs of resilience as the threat of the Fed easing lingered and weighed on the greenback. It recovered to 1.3065 and was holding above 1.3000 by the time of writing.

In the short-term, the 61.8 per cent fibonacci level at 1.3050 in the wave from June 2010 lows to May 2011 highs will be decisive for further direction. A break below 1.2930 will be needed to confirm further downside, giving scope for a test of 1.2875. To the upside, the 100-day moving average at 1.3120 provides resistance, before 1.3180/90-area.

The Japanese yen is now again the favoured currency while forex investors are in risk-off mode. USD/JPY risks are now tilted towards the downside, particularly in the absence of intervention threats. The pair fell to its lowest since February 21 by 79.65. It has so far failed to close below its 100-day moving average, now by 79.69, but a move lower could pave the way for further losses towards 79.00 or lower to its 200-day moving average by 78.41.

Upcoming FX key events:
Today: Norges Bank Interest Rate Decision, UK BoE Interest Rate Decision & Asset Purchases Target.
Tomorrow: German CPI, Canadian Net Change in Employment & US PPI.

Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 78.00.
GBP/USD is bullish, target 1.6300, key reversal point 1.5900.
USD/CHF is neutral. AUD/USD is bearish, target 1.015, key reversal point 1.07.
NZD/USD is bearish, target 0.80, key reversal point 0.8350.

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Mr Xuereb is a trader at RTFX Ltd.