By Kevin Muir of The Macro Tourist
Remember how a couple of weeks ago investors were scrambling to buy Euro currency protection in front of the French election? Today, worries concerning the second round between Le Pen and Macron are rarely mentioned. Macron’s win has pretty well been priced in.
I don’t have a forecast regarding the outcome of the election. I am not making some bold Trump-like upset prediction. The polls have Macron winning, and that’s the most likely result.
But I wonder if we aren’t setting up for a buy-the-rumour-sell-the-news reaction.
Last month, while dreams of a Le Pen win filled investors’ nightmares, the Euro was on offer. It declined from 1.09 to 1.055. On election day, as the results were announced, the Euro spiked higher, retracing the entire decline.
That behaviour will most likely not be replayed after the next round. Regardless of whether Macron or Le Pen wins this week-end, the reaction might be to sell the Euro. Let’s not forget the ECB is still actively monetizing their balance sheet with a massive quantitative easing program, while the Federal Reserve is pushing to reduce the size of theirs. Yeah, I know the Euro is cheap, but there is no catalyst to cause a large rally right now. The political risk has by no means gone away. Italy is next up on the block, and their dire financial situation makes Italy potentially even more worrisome than France. And even with a Macron win, nothing has been solved in Europe. A cheap Euro will be continue to be one of the easiest ways to postpone the inevitable.
I understand that if you look a little farther out, an argument could be made that the next big move from the Fed will be to slow down their tightening pace and for the ECB to ease up on their accommodation, but that’s a story for next quarter, or maybe even later in the year. Like Augustine said, “Lord grant me chastity, just not yet!” For now, with more Euros being created and less U.S. dollars in circulation, the trend is towards a weaker Euro.
But the real kicker on why this latest Euro rally might stall, was pointed out by the terrific Nordea Bank strategist Martin Enlund.
The Euro has a strong seasonality pattern to decline in the month of May.
Over the past dozen years, the Euro has declined an average of 1.88% during the month of May. If you remove the crazy 2009 episode, the decline would be even greater.
Right now with Macron exuberance filling the air, the Euro is bid. Yet I am not optimistic that the current Euro rally will accelerate. I suspect it was merely a short covering rally on news that Le Pen did not sweep into power.
I am using this rise to sell into. I still like shorting EURGBP best, but at this point, I am adding an outright short EURUSD position.
The technical longer term trend is down, the fundamentals still dictate a lower Euro, and now we have seasonality working in our favour. A stab on the short side seems like the right move.