Euro traders are largely ignoring the political risks heading into the weekend
The chart above shows how the euro has performed against the major bloc over the last week. It’s the third best performing major currency behind only the dollar and the yen. Could you really tell that there are potentially big headwinds coming based on that?
Just for comparison, sterling is facing its own political headwind in the form of Brexit and it’s the second-worst performing major currency during that time. You wouldn’t really say the same for the euro, would you?
On 4 March, we’re going to have the Italian elections and Germany’s SPD party is set to announce the results of its postal votes — on whether or not their members support a coalition deal with chancellor Merkel’s Conservatives.
For the Italian elections, the negativity on the euro will largely depend on the outcome, but it’s been quite a while since we had talks about any potential ditching of the euro. Risks are there, but it’s more contained to the local front at this point.
Meanwhile, for the German votes, personally I don’t expect a surprise that the SPD will vote against a coalition deal. It’s not certain, but chances are slim on that front. But regardless, the spot market looks to have positioned itself for an almost riskless week ahead in Europe.
And that’s where the biggest risk is. It’s all about positioning, and right now, the market is positioning itself for basically more or less non-events (or if anything more on the bullish front) for both the Italian elections and the German votes. There lies the danger.
Politics will always be politics and in the event the extraordinary happens on Sunday, guess what? The pain in the euro positioning right now is going to be felt quite heavily come Monday morning in Asia.