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Digital Subscriptions > The Hedge Fund Journal > Issue 127 - October 2017 > Europe

Europe

How markets view integration versus disintegration

ERIK NORLAND, SENIOR ECONOMIST and EXECUTIVE DIRECTOR, CME GROUP

Opposing forces championing integration versus disintegration are assailing Europe. In the past two years both sides have scored important victories. Britain’s Brexit, Spain’s Catalonian independence referendum and the entry of the nationalist Alternative fur Deutschland (‘AfD’) party to the German parliament, or Bundestag, were victories for proponents of lesser European unity. The electoral defeat of far-right forces in the Netherlands and the victory of Emmanuel Macron in France were celebrated by those favoring the guiding principle of an ‘ever closer union’.

Whatever one thinks of Brexit, the prospects for deeper European integration and the legitimacy of the various national independence movements, the currency markets’ view is unambiguous: they strongly favor deeper political integration:

• When exit polls mistakenly called the Brexit referendum for the ‘Remain’ voters, the British pound (‘GBP’) rallied from 1.45 to 1.50 versus the US dollar (‘USD’) before crashing, first to 1.32 and later to as low as 1.18 versus the USD when the ‘Leave’ victory became apparent. The euro fell 3% versus the USD on the day of the Brexit referendum and fell nearly 10% versus the USD within six months.

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