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Politics won't really influence foreign exchange markets

The lukewarm reaction to Emmanuel Macron's election as the French president shows that the direction of foreign currency markets are now determined by economic and interest rate developments. The euro is no longer affected by concerns regarding the future of the European Union. This is according to Laurens Maartens of the Nederlandsche Betaal- en Wisselmaatschappij.

Macron's victory was simply noted on the financial markets. Although the threat of France, under Marine Le Pen, leaving the Union has finally been quelled, the most important European Stock Exchange Indexes closed in the red. In the foreign exchange markets, the Euro rose slightly compared to the Japanese Yen and the Swiss Franc, but ended lower against the US Dollar.

New trend determines currency direction
The market's mediocre reaction was largely due to the fact that traders had anticipated Macron's win in recent weeks. Right after the first round of the French elections on 22 May, the euro shot up 2% to 1,09 US dollars. It then rose further to 1.10 right before the decisive election round, after which the mood turned again. This was all due to the shift of European politics attention to a more structural trend.

US interest rates rising
The interest rent on US government bonds has risen from 2.2% to 2.4% after a considerable decline between mid-March and mid-April. Higher interest rates makes it more attractive for companies to maintain their assets in dollars. In addition, it seems that US short-term interest rates are going to increase soon. The 0.7% growth of the economy in the first quarter made little impression, but there are very favourable underlying developments. Unemployment has fallen to a new low of 4.4% and property prices are steadily rising. US listed companies' profits grew about 10% during the first few months of the year.

Europe attempts to catch up
Due to the positive economic outlook, it is anticipated that the Federal Reserve (Fed) will also raise short term interest rates at their next meeting in mid-June. Interest rates are very low in Europe. There will be no change in the short term, but there is a good chance that the growth in the first quarter will lead to more speculation that a European Interest Rate hike is closer than expected. In the meantime, the European Central Bank (ECB), must first stop trading bonds and other assets; a stimulative measure which ECB-president, Mario Draghi, was critised for during his visit to the House of Representatives.

Media attention will be high
Media attention is, undoubtedly, going to be high over the next few weeks, with the focus being on the British House of Commons election on 8 June and the German Bundestag elections, which are to be held in September. The direction of the euro/dollar is at present, however, being dictated by the economic and interest rate developments on both sides of the Atlantic. The most likely scenario is that the exchange rate will move laterally in the coming weeks with the possibility of a stronger dollar in the run-up to the next interest rate decision from the Fed.

For more information:
Laurens Maartens
Nederlandsche Betaal & Wisselmaatschappij
Beursplein 5
1012 JW Amsterdam
Tel: 020-5782434
Laurens@nbwm.nl


Laurens Maartens is a currency expert at the Nederlandsche Betaal & Wisselmaatschappij (www.nbwm.nl). He started his career in 1998 at the Swiss bank, USB. Since then he has been employed by various companies at home and internationally. He comments on current foreign exchange developments in the printed and electronic media as well as on the radio. He also give lectures and training for entrepreneurs in the field of currency management. He urges investors to choose cheap, simple currency products. In this column he shares his personal opinion. The information is not intended as professional investment advice or are as a recommendation to invest via the Nederlandsche Betaal & Wisselmaatschappij NV.

Publication date: 5/12/2017


 


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