Moving goalposts may be an own goal for the euro

LONDON: Seeing yourself as others do can be instructive and if the euro takes a further tumble on the back of the French and Greek elections in coming days, currency bloc policymakers might consider a hard look in the mirror.
It’s already notable that with the euro having opened against the dollar in Asia this week significantly below its $1.3082 close in New York last Friday, it has not yet been able to fill the gap on the chart and regain that level.
Admittedly, neither has the euro fallen away precipitately but that may be more a function of the fact that investors are mulling over events than evidence of confidence in the currency.
International investors may conclude that political changes wrought in France and Greece will undermine the wider euro zone’s commitment to the recently agreed fiscal pact in particular and to austerity measures in general.
As any builder knows, once changes are made to the architecture, there’s always a risk the building falls down.
While French President-elect Francois Hollande may have alienated some investors by declaring the world of finance to be his “enemy” during his campaign, that might be written off as mere rhetoric.
Hollande’s stated desire to see a renegotiation of the fiscal pact agreed by European leaders in March, a pact intended to end the euro zone’s financial crisis, is a different matter.
Investors like certainty, and with the fiscal pact, they thought there was a roadmap toward recovery. If Hollande now wishes to head off in a whole new direction, many investors could demur.
Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, may have made it clear no such renegotiation is possible, but investors might look askance even at attempts to revisit the issue.
The numerical victory of anti-austerity parties in Greece’s election on Sunday, even if they cannot form a government, hardly suggests the euro zone’s efforts to end its crisis are rooted in solid rock.
Even PASOK leader Evangelos Venizelos, who as finance minister arranged Greece’s second bailout, said the deal should be renegotiated to lessen the burden on Greeks.
Investors will be unlikely to be impressed by the sight of Venizelos urging modifications to a deal he helped negotiate only months ago.
This may be where the real risk to the euro lies after the weekend’s elections.
To the extent that the investing community have bought into the framework of measures agreed by the euro zone to fix its problems, political pressure to revisit that framework can hit confidence hard.
The question traders should perhaps be asking themselves is whether the international investing community is more or less inclined to lend to or invest in the euro zone after the results of last weekend’s elections.
If the answer is “less,” then the conclusion should probably be that euro/dollar grinds lower.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.