In 2016, the currency markets had its fair share of geo-political event risks. The Brexit referendum in June, the U.S. Presidential elections in November and the Italian referendum on constitutional reforms are but a mere beginning into what could be a major event risk for the euro in 2017.
While the Italian referendum failed to surprise the markets, the other two events did have a major impact on the currencies. One of the main facts that stood out in 2016 has been that politics has taken center stage and with populist and protectionist views gaining ground, it has started to threaten the very basis of globalism.
The risks are even more heightened as the three major policy influencing countries in the eurozone head to polls in a tight timeline, or broadly put, the latter parts of the first quarter and the early second quarter in 2017.
The eurozone crisis is nothing new for the single currency
The single currency, euro, is no newcomer to controversy and has often found itself in the eye of the storm. Be it the banking crises or a debt crises or even the recent trend in the rise of anti-establishment/anti-EU political parties. The single currency is also one of the favorite currencies that is often talked about by critics as a currency that is doomed to fail in this rather large monetary and economic union experiment.
Otmar Issing, a professor and a former chief economist with the ECB told BBC’s Wake up to Money program in November that “The euro is in good shape. It is still the second most important currency in the world. I wish I could still say the same about the eurozone, where a lot of risks are looming.” Issing was one of the influential members in shaping of the euro in the late 90’s and did not hesitate to say that the eurozone was at risk due to the many economic basket cases that have been allowed to join.
Key risks: The elections
The Netherlands, France and Germany will be heading to polls next year. Combined, the three countries represent 56% of the Eurozone’s economy and are part of the six founding member nations of the European Union.
As each of the three nations head to polls, political leaders will have to battle the rapid rise of populist, conservatism political forces, with most of them leaning to the right. Calls for revoking the free movement of people and setting up borders has been increasingly growing louder in an economic region that has struggled with growth, unemployment and made only worse by the refugee crisis from the war-torn Syria.
While the incumbent parties might have taken it easy so far, the turn of events in the outcomes from Britain and the U.S. has put the ruling parties on the edge of their seats. Germany’s chancellor Angela Merkel’s return to power will be the pivotal point for the eurozone next year. However, France’s rise of Marine Le Penn cannot be underestimated as the right leaning leader has been seen making strong inroads politically and the situation is almost the same in just about every major economy in the eurozone. Combined this could potentially bring about seismic changes to the very structure of the EU.
Timeline of events: 2017
- German presidential elections (February)
- The Netherlands presidential elections (March)
- French presidential elections (April – May)
And then there is the Brexit issue which is interestingly timed around the March period. The outcome of the elections by then could potentially either put more negotiating power in the hands of PM Theresa May or a unified Europe could see Britain’s leverage weaken.
For a world that is now deeply interlinked, forex traders will need to be especially careful as they head into the New Year. While it is quite possible that the single currency will go nowhere at least for now, the risks from Europe is however likely to shape the future of the region’s economy over the long term. While the euro might be the currency at risk next year, traders should also keep a close eye on other currencies including the Swiss franc, British pound and the yen and of course gold.
