The instinctive reaction of markets to a more
isolationist/protectionist world is to favour the currencies of
countries with large current account surpluses, as these are the winners
if capital stays at home. That may be too simplistic, but the yen and Euro are natural initial winners. FX positions are much less stretched than bond ones but a further final flush of Euro and Yen shorts is a risk here.
The first round of the French Socialist Primaries shows a clear shift
to the left, with Benoit Hamon gaining most votes and heading into the
second round with Manuel Valls this weekend. A Hamon win would leave a
big gap in the centre ground, to the benefit of Emmanuel Macron. In many
ways, it is easier for a centrist candidate to galvanise cross-party
support in the Presidential election and so, this result may well be
seen in FX=-terms as Euro-friendly. There are far too many twists and
turns ahead in this election us to alter a view that at some point, political nerves will drag the euro down but today or tomorrow we may well see a break back above EUR/USD 1.08.
We might be back over 1.08 soon, but I expect first test and rebound from 1.0710/20.