Elections and Recessions ... what else can the world throw at the currency markets?

Week Commencing Monday 7th May 2012


Overriding Market Themes


France has emerged with a change in leader after just one term of Nicolas Sarkozy and the centre right. Francois Hollande swept the incumbent president aside in a albeit close race for the top job winning 52% of the votes, and delivering the rather ghastly honour on Sarkozy as the only leader not to secure a second term since 1981. Hollande is a worry for many in the Eurozone, and his consistent rhetoric on rewriting the fiscal compact will have many in the rhine-land fearing the worst, especially after Angela Merkel was so fervently pro-Sarkosy in the run-up to the election. What does this mean for France though? Well, expect a tirade of big government schemes which will indeed spur some form of state inspired growth, however big business (especially in the financial services sector) and high earners will be digging for their passports. More generally, it will be interesting to see how Hollande will shape European policy moving forward, and will the German’s need to seek another government to fly the austerity flag with them and could this forge the beginning of Camkel?


Back in sunny Greece, the leader of the countries far-left is trying to form a government after a devastating election for the country’s mainstream parties. Much like in France, Greek voters went for less austerity, more spending in their political choices this weekend as the country struggles to implement its austerity package. Markets in Greece collapsed as the results became apparent, with the Greek stock exchange falling just over 7 percent on the day and forcing the Euro to decline over 1 cent against the Pound. Worryingly, the far-right seemed to have a good night, taking nearly 7 percent of the vote. This presents a potentially sad outcome to the Greek and European situation, as 70 years ago the European dream was born out of a need to prevent European nations falling into the trap of neo-nazism. Until a new government is formed the direction Greece will take remains unknown, and indeed it is possible that no government will be formed and the country will go to the ballot box again. Watch this space.


I bet David Cameron wishes there was better news at home, however his party took a thrashing in the polls during last week’s local elections. The Conservatives lost just over 400 seats whilst their liberal partners lost a staggering number of their seats. The result in my mind for the conservatives isn’t that bad, considering that the country is implementing the biggest budgetary cuts since the Second World War; however it is clear that the people are beginning to dislike the antics of the Prime Minister and his Chancellor. Will this lead to any form of policy change, I doubt it so expect more government budgets to be cut as we move closer to 2015. I guess if I were David Cameron, I would thank god for Boris Johnson, who did the impossible and kept London blue, but could this be bitter sweet for the Prime Minister at the 2015 elections?


In further news in the UK, the CEBR has proclaimed that unemployment will likely rise almost everywhere in the economy as the government continues to slice into government budgets. The north-east will likely be hardest hit, with the CEBR projecting an increase to a whopping 13 percent in 2016, whilst London storms up close to 11 percent unemployment. All this adds a burden to the social state and there is an argument that cuts on the one hand are being replaced by increases in the social welfare state, especially whilst the private sector continues to struggle with the lack of credit in the market.


GBP This Week


This week is Bank of England week, with both the rate decision and an updated view on the banks asset purchasing program. Although we don’t expect anything to change, it will be interesting to see how Mervyn King views the current situation in the UK, especially the outlook over the coming quarters in terms of GDP. Also on Thursday we have the NIESR GDP Estimate for the UK, coming in at an estimated 0.1%. Although this is an unofficial estimate of UK GDP coming a month before the official release, it will be interesting to see if we get another negative figure and if it does anything to stem the highs in GBP/EUR.


USD This Week


Highlight of the USD calendar is the University of Michigan Confidence which should show a flat line against its previous figure. The only other release of note is the Monthly Budget Statement release on Thursday, which should post roughly around the 30 billion US Dollar mark. Watch out of Bernanke too, who is making a speech entitled ‘Banks and Bank Lending’ on Thursday. Somehow whenever he opens his mouth the dollar drops off a cent or two!


A quiet week all round for the dollar, although most eyes will continue to focus on Europe so expect USD drivers to be sentiment led.


EUR This Week


Obviously the Eurozone crisis continues to dominate any European lead news release, so expect volatility surrounding updates on both Greece and France this week. On the data side, the ECB monthly bulletin will be interesting to read and should show some insight in how the ECB believes the zone is coping with its massive budget busting agenda.  German industrial production on Tuesday should some good news for the EZ’s biggest economy with a increase in production for the month, whilst French Industrial Production is expected to fall on Thursday.


In Other News


One word of advice to all, go grab a curry tonight, it will make you live longer. Forget omega 3 in fish and start thinking of a vindaloo because I know I am. Trials in Leicester have found links between south Asian cuisine and a reduction of bowel cancer rates. These stories are great, and I will take this to heart along with the ‘glass of red wine is good for your heart’ advice too. What a shame they haven’t found a fat busting chocolate bar and anti-cholesterol larger. 


 


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