Natixis ‘Strategic Daily’ note says the political risks will end up weighing on the EUR/USD in the short-term and contribute to the pair correcting towards parity come June.
Key points
First up, there are the general elections in the Netherlands, the risks attached to this event not having been priced in sufficiently considering that the PVV, the eurosceptic party led by Geert Wilders, is still in the lead in the opinion polls. As the PVV is credited with 35 seats but needs 76 for an absolute majority, it will not be able to govern without forming a coalition government, but its victory will probably be met with a frosty response by the markets, especially as there are elections shortly afterwards in France, the outcome of which are most uncertain.
The bond market is starting to price in the French risk, the OAT-Bund spread having widened from 30bp before Trump’s election to 76bp this Monday after the speech by François Fillon. The market is also bringing pressure to bear on Italy, so that even though the probability of early elections has subsided, the BTP-Bund spread reaches 200bp.
Even though the US dollar is on a negative run and at Donald Trump’s mercy (since the Federal Reserve is conspicuously absent), our view is that European political risks will end up getting the better of the euro and contribute to the EUR/USD correcting toward parity come June.
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