Euro under pressure of the French riots

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The European currency last week made several attempts to start rebuilding, but they were all unsuccessful. Attempts of growth on Thursday was interrupted by a reaction to the latest ECB in which traders have seen a slight revision downwards of forecasts on growth rates. Was released on Friday PMI in the Eurozone, Germany and France. All the figures were weak, but the weakest French: all PMI fell below 50, which indicates the beginning of the recession.
Apparently, the protests against rising fuel prices that threatened to escalate into a political crisis, has had an overwhelming effect on the mood of the French business. The strengthening of the dollar against the Euro had a positive impact for the dollar in other pairs, at the end of the week, the dollar index, contrary to our expectations, recovered, and closed at the level previously established highs in the area of 97.5.
We believe that the entire French negativity is already priced in. The decline in the popularity of Macron of course unpleasant for Euro-optimists. His victory, in his time, was the primary driver of the rebound from the levels below 1.1 EUR/USD, where the single currency could not grow until I left the risks of the victory of marine Le Pen in the last presidential elections. However, the unpopularity does not mean a momentary weakness – a weakness in the long term. The Parliament is controlled by the supporters of Macron, his foreign policy, including European, are amended.
The protesters will likely be satisfied with the concessions that they have been sedlan, in the end, the French democracy will allow them to Express their attitude to Him and agrees with him the political forces in the next election. So now the negative peak is passed, and the problems for supporters of the EU and a new chance for his opponents back to the beginning of the next political season. On the other hand, in the decision of the Italian budget issue, there has been clear progress.
The parties went from loud statements of the ultimate nature of compromise, and he probably soon found bude. This will give a positive impetus to the Euro. All these political events, which is a short-term background should not overshadow the main thing: the ECB no longer “print money”, and the latest data on European inflation, which show her to recover even a little ahead of the forecasts preclude further softness. On the other hand, the fed should wait for easing of a position the rate for a rate hike.
Since the fed is now carrying out procyclical policies, the recent decline in yields of US Treasuries at the long end and the fact that the yield curve finally came in the inverted condition, gives reason to expect softness. So it or not, we will see this week when the fed will announce its interest rate decision and accompanying comments.
We expect softness from the fed and reducing political risk in EU, so you will still put on a medium-term upward correction of the Euro. Also, the decline in the dollar yield allows us to wait for the development of the medium-term strengthening trend of the yen.

The ruble

The Bank of Russia last week has predictably raised rates by 0.25% and announced the return after the holidays on the currency market. Against the background of stable oil and strong in the time dynamics of the dollar, the ruble sank for the week, and the loss fell on Friday, indicating that speculators have perceived the return of the Bank of Russia on the currency market as the most significant factor in monetary policy.
In our view, other things being equal (stable crude oil and dollar index), the ruble will weaken in the first quarter under pressure from the Bank of Russia FX interventions. This trend will be inevitable in the first quarter surge in inflation, as a reaction to the VAT rise. In connection with these expectations, we do not recommend to go on holidays with the ruble’s position. Perhaps after the fed meeting this week, the dollar will weaken, which will give the opportunity to leave the ruble at the best rate, i.e. in the 65.5 – 66.0.

The stock market

The market is bearish, the S&P-500 is aimed at testing the February lows around 2540. If the fed will demonstrate the softness, it may be a small pre-holiday rally, which we suggest to sell. The Russian market is also under pressure as part of a General trend, the RTS has a good chance to go below 1100 and then to the August lows around 1050.
Dmitry Golubovsky
FG “Kalita-Finance”