Ready for a really important election?

And, no, I don’t mean the Republican primary in New Hampshire on January 10.

I’m talking about a race where one contender has compared his opponent to a sugar cube, where another calls the incumbent “The Bonsai,” and where the incumbent thinks his best hope for re-election might be reversing his no new “generalized” taxes pledge.

And, where the results could throw the EuroZone into such complete chaos that it could lead to the end of the euro.

I’m talking about France, of course, where President Nicolas Sarkozy currently doesn’t have a truffle’s chance in Lyon of winning the April 22/May 6 double-elimination election.

There’s a serious issue here beneath the sheer entertainment value of an election where one candidate (Dominique Villepin) calls his opponent (Sarkozy) an uncultured oaf. Sarkozy is committed to making the euro work and he’s developed a working relationship with Germany’s Angela Merkel that has crafted the current solution (such as it is) to the euro debt crisis. (For more detail on the Merkozy solution to the crisis and what it would mean for the EuroZone if it is implemented, see my December 23 post http://jubakpicks.com/2011/12/23/lets-say-merkel-and-draghi-get-the-eurozone-to-follow-their-plan-then-what-do-the-european-and-global-economies-look-like-next-year/ His main opponent and the current leader in the polls, the Socialist Francois Hollande, has made it clear that he thinks Sarkozy has given away too much to Merkel’s Germany. He has more than signaled his opposition to the treaty of fiscal discipline that Merkel and Sarkozy worked out at the last European summit going so far as to say that if he is president, France will never sign. Hollande’s solution to the euro debt crisis is so radically different from Merkel’s that it’s hard to see how the two countries could bridge the gap.

And without the German-French partnership it’s hard to see the euro surviving, frankly.

Think the markets might freak out over this possibility if Hollande is still leading in the polls in, say, March? Read more

The volatility, the geopolitics, the worries over slowing economic growth weren’t bad enough—now we have to keep an eye, like we’ve got one to spare, on currencies.

I’d argue that over the last two weeks to a month, the rising dollar has been the most under-appreciated driver of stock prices. And the weeks ahead are setting up the dollar, the euro, the Chinese renminbi, and the Brazilian real as big market movers. The reversals and the rallies of the next month are likely to signaled by, related to, and amplified by currency moves.

Watch carefully if you want to catch the next rally—and avoid getting blindsided by the next reversal.

Look at the dollar’s climb against global currencies from August 30 to September 27. During those four weeks the dollar gained 7.7% against the euro, 8.8% against the Australian dollar, 9.0% against the Norwegian kroner, and a whopping 15.4% against the Brazilian real. Even the Chinese renminbi lost ground to the dollar, as Beijing let the current slide to a 3.6% decline versus the dollar.

The Why? is pretty simple. Read more

Swiss peg franc to the euro–that’s one less safe haven in the financial markets and one more reason to favor gold

And then there was one less—safe haven in the financial markets, that is.

Yesterday the Swiss National Bank moved to fight the damage done to the Swiss economy by a rising Swiss franc by pegging the currency to the euro at a ratio of 1.20 francs to the euro.

The franc tumbled 8.2% against the euro immediately and 8.8% against the dollar.

The Swiss National Bank has tried to intervene in the currency markets by selling francs in order to force the currency lower. That hasn’t worked and cost the bank about $23 billion in losses last year and $12 billion this year.

A peg to the euro won’t require the bank to flood the market with francs and thus won’t expose the bank to currency losses but it does impose other costs on the Swiss economy. The bank will simply print francs to keep the currency peg in force but that will result in a potentially huge inflationary surge in the money supply. To counter that, the bank will have to intervene to try to soak up some of those extra francs. This process, called sterilization, is never perfect and the peg will almost certainly increase the inflation rate in the country.

But that’s a price that the bank is willing to pay in order to avoid having Swiss exports priced out of world markets by the rising franc—or having Swiss companies move jobs overseas to cheaper currency countries.

The world’s financial system will pay a price too. Read more

Higher interest rates and a stronger euro on their way in July

Jean-Claude Trichet, head of the European Central Bank, spoke the magic words today: “Strong vigilance.”

The phrase has become the central bank’s reliable signal of a coming interest rate increase. The financial markets can now anticipate an interest rate increase, probably a 0.25 percentage point move, when the bank meets in July. The bank left its short-term benchmark interest rate at 1.25% today as expected.

Not too far down the road a resumption of interest rate increases from the European Central Bank—while the U.S. Federal Reserve remains on hold with the short-term U.S. benchmark rate stuck near 0%–will lead to a stronger euro against the dollar. (Higher euro interest rates will attract more buyers to euro denominated assets.)

Not too far down the road, but not today. Read more

All eyes this week—well, all the eyes of currency traders and stock investors anyway—are focused on what’s being called the “troika.” Officials from the European Union, the International Monetary Fund, and the European Central Bank are expected to complete their review of Greece’s progress in meeting terms of the rescue package this week. If they rule that the Greek government has made insufficient progress that could jeopardize the next $17 billion in funds scheduled to be delivered to Greece in June. Without those funds, Greece could wind up defaulting on its debt.

The odds that Greece would pass this review got worse last week when, on May 24, Greek Prime Minister George Papandreou failed to win agreement on new austerity measures from the main opposition parties. The new measures include an additional $8.5 billion in budget cuts and new sales of state-assets.

The Greek people shouldn’t be “trapped by blackmail,” said Aleka Papariga head of the Communist Party of Greece, after the talks. Antonis Samaras, leader of the biggest opposition party New Democracy, called the new steps the “same old failed recipes.”

Sounds like promising grounds for a compromise, no?

The troika has demanded that Greece adopt these budget measures before it approves the next tranche of the initial bailout and before considering additional aid for 2012. Read more