With key elections due in the Eurozone in 2017 investors will be asking where money might flow should an unsavoury election result be delivered.
“Who would be resilient?” asks Sheena Shah at Morgan Stanley who has looked into the potential financial outcomes of electoral upsets. “Unsurprisingly JPY scores high here, but CHF, GBP and CAD”.
Many will be interested to note the inclusion of the much-maligned British Pound in the list of safe-havens.
But for Shah, it makes sense for investors to turn to the UK should the Eurozone undergo uncertainty.
“GBP is an interesting proposition - it benefited from safe-haven inflows during the eurozone crisis, but in a post-Brexit world it's less clear how the currency would perform,” notes Shah. “We maintain that GBP would still be a safe haven, if not to the extent it was in the past”.
As complicated and uncertain as Brexit is, Shah argues that a Eurozone breakup would raise even more questions.
“For European investors looking to store cash, the UK's large financial system that is easily accessible may be an attractive option. In addition, if the European project is under strain then it would put the UK government in a stronger position to negotiate a post-Brexit deal, supporting GBP,” says Shah.
The Swiss Franc and Japanese Yens’s net foreign asset position should meanwhile offer repatriation flows that are supportive in a risk off environment, while CAD's lower relative exposure to Europe could lead it to outperform its commodity currency peers, if not USD.
Netherlands is First Major Test
While the French elections in April/May are the key risk event for foreign exchange markets, the Dutch elections on March 15 come first.
Up until recently, the election was not seen as a major market risk event, as polls indicated that the Netherlands' mainstream parties would most likely form a coalition majority, precluding the far-right Freedom Party from taking power.
"While polls suggest the lead of the Freedom Party is now at 9% compared to the second ranked VVD, the polls should continue to be watched by markets," argues Shah.
The ‘Forum for Democracy’ think tank that organised and won a referendum last April opposing an EU association agreement with Ukraine has turned into a fully-fledged political party with the same name.
Its leader, Baudet, predicts his party will win enough parliamentary seats to give him leverage in post-electoral coalition talks.
Importantly, he has an anti EMU stance and has stated that he does not rule out a coalition with the Freedom Party of Gert Wilders.
"The markets may not be as focussed on the Netherlands election today and the impact it could have on the EUR," says Shah. "All of that said, we note the route towards a Netherlands referendum would require many steps."
These were discussed by Morgan Stanley's economists here but in summary, 300k public signatures are required to initiate a referendum and then parliamentary approval.
If the vote occurs then a quorum of 30% of the population are required to vote in the referendum to make it valid.
"We think the EUR would weaken if a country within the Eurozone moves towards having a referendum on membership of the EU as markets will ask which country could be next. In the run up to any referendum, the market impact could be felt in global FX markets, and this week we have had a taste of this, as peripheral spreads continued to widen, strengthening traditional risk off currencies like the JPY and CHF," says Shah.