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Analyst Interview: Christopher Vecchio on the French Elections, NFPs

Analyst Interview: Christopher Vecchio on the French Elections, NFPs

Christopher Vecchio, CFA, Senior Strategist

Françios Hollande vowed to change the fiscal compact and the relations with Germany. Do you think that his election will affect the euro?

It is highly likely that the French elections will impact the Euro, but over the medium- and long-term, not necessarily the day after the results are announced. French President Sarkozy is out of touch with the French people, an increasingly disgruntled populous becoming more averse to helping saving the notion of a broader Euro-zone. Case and point: Marine Le Pen, the president of Front National (FN), a far-right nationalist party, garnered approximately 18 percent of the vote during the first round of the French elections. Leading challenger Socialist Francois Hollande’s general platform differs greatly from that of Ms. Le Pen but they share one commonality: they both oppose how President Sarkozy has handled the European sovereign debt crisis. In fact, Mr. Hollande has sworn to renegotiate the European Union Fiscal Compact. He has also said that it’s time to concentrate on growth rather than austerity – as if economic growth in the current environment is that simple or was overlooked entirely the past few months.

If Mr. Hollande moves to repeal austerity measures and in the process frays France’s relationship with Germany, market participants will be hamstrung by political war games with the Euro as the collateral damage. Confidence would be lost in the Euro-zone’s core and leadership; bond yields will rise across the region; and the European Central Bank will be forced to act and if they don’t, the crisis could worsen. The international community (mainly via the International Monetary Fund) has been reticent in offering up a significant package of support, and I believe we’re done seeing more contributions to the ‘save Europe fund’ (loosely quoting Canadian Finance Minister Jim Flaherty). A Euro-zone without political leadership in union or support from a supranational agency, a crisis of confidence in the Euro-zone stoked by a difficult Mr. Hollande would easily sink the EURUSD below 1.2000.

Will the upcoming Non-Farm Payrolls release show that last month's weakness was a one time event or will it be soft again and point to a slowdown?

Last month’s print was particularly disappointing for two reasons: it crashed below the three-month and six-month averages of job growth; and it fell below the lowest of forecasts collected by Bloomberg News. I take a similar stance on this issue to that of William Dudley, the head of the New York Fed. In mid-March, he was quick to note that “unseasonably warm” conditions prompted a pick-up in construction projects that typically are on hold; recent data supported this thesis as well, with construction activity picking up at the start of the year. Now that the seasonal adjustment period is winding down, I expect jobs figures to slowly climb back towards the slippery 200K figure. Today’s ISM manufacturing report for April supports this view, which showed that the employment sub-index jumped to its highest level since June 2011. While NFPs and the employment sub-index have diverged recently, taking into account the ISM non-manufacturing employment sub-index, both ISM reports are pointing to stronger job growth through the rest of the second quarter. A strong jobs report Friday would be very bullish for the US Dollar, especially against the Japanese Yen.

The British MPC seemed to move away from more easing, but the recent GDP data that put Britain in recession cast a shadow. What course will the central bank take?

The British Pound remains resilient in the face of poor economic data, and this is clearly due to talks that the Bank of England may be winding down its expansive quantitative easing programs sometime in the near-future. Taking a look at the Credit Suisse Overnight Index Swaps, Sterling traders barely pared back their bets of a more hawkish BoE this year in light of the poor GDP reading. This could be due to the inflation picture in Britain right now, where price pressures are starting to creep back up again.

It’s also worth mentioning that the Sterling is benefiting from the Euro-zone crisis. With Swiss National Bank-mandated capital flows on the Swiss Franc (via the EURCHF 1.20 floor), the historical safe haven doesn’t live up its former glory. Instead, the British Pound, like the Japanese Yen and the US Dollar, have benefited as investors have sought shelter from the debt storm sweeping Europe. The combination of a BoE that is slowly becoming more hawkish and the Euro-zone crisis, the Pound is poised to gain over the next few weeks.

The Canadian dollar enjoyed some strength recently, yet there is a lot of talk about a bust of a housing bubble. Is this danger real?

There is potential for a real danger but it hasn’t been realized yet. When the US household debt-to-GDP figure ticked above 100%, that’s when the real problems began; Canadian household debt-to-GDP has been stable around 94% (currently at 94.21%) since 2009, lending to the notion that Canadian consumers haven’t overextended themselves as much as citizens of other advanced economies, but have also done less to deleverage. The US household debt-to-GDP ratio fell to 90.68 percent by the third quarter of 2011, in contrast. For now, comments by Bank of Canada Governor Mark Carney are preemptive in nature, and it is unlikely that this problem accelerates without a significant fundamental catalyst, for example, a significantly weaker Canadian labor market or dramatic slowdown in US economic growth (the United States is Canada’s largest trading partner).

With some weakness in US indicators, is the "risk on / risk off" trade where positive US figures weaken the dollar and negative figures strengthen it as a safe haven currency back in full throttle?

That seemed to be the cast from the March NFP meeting through today, with the deceleration of the US Dollar coming late last week after being the world’s reserve currency was hit by a dovish Fed chairman and a poor growth reading, which enforced the chairman’s dovish view. Today’s ISM manufacturing report has seemingly turned back the tide, though the legitimacy of this move is questionable given the thin trading conditions in place right now for the Asian and European holidays. Still, the ISM’s report strengthened to its best level in ten-months and the employment sub-index improved as well. As hinted at earlier, I believe this Friday’s NFP report is going to definitively define the US Dollar’s trend for the next few weeks that is until the next FOMC meeting or a rapid meltdown in Europe. A strong jobs report Friday would be very bullish for the US Dollar; a weak jobs report Friday would be very bearish for the US Dollar.

--- Written by Christopher Vecchio, Currency Analyst for DailyFX for an interview with

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