French President Emmanuel Macron may face a no-confidence vote over the “gilet jaunes” or “yellow vests movement,” opening up the possibility for the anti-EU Marine Pen to re-enter the political fray;
The Italian government has dug its heels in over the European Commission’s desire to dictate its budget, despite not breaching the 3% deficit-to-GDP ratio;
Angela Merkel is nearing the end of her term as German Chancellor, with no clear successor in sight;
The Spanish government’s ruling mandate has proven weak, and fresh elections could emerge in early-2019 that produce an anti-EU government;
Brexit continues to go off the rails (although that’s more a function of the UK than the EU);
and the European needs a new president, as Mario Draghi’s term ends in October 2019.
Following the Brexit vote in June 2016, fears swelled over the rise of populism across the continent. But following defeats by populists in the spring of 2017, political risk for the Euro has seemingly been relegated to the backburner. Now, as the calendar turns to 2019, the grace period for European politics may be over. The preferred avenue to express this negative EUR bias is via EUR/JPY . The Japanese Yen side of the trade is appealing, given the Yen’s role as a safe haven during times of significant economic and political turmoil (which is the risk to the Euro at present time).
Fundamentally, a tweak to Japanese fiscal policy may also serve to support the Yen moving forward: starting in 2019, the Japanese Global Pension Investment Fund (GPIF) will start hedging its investments denominated in foreign currency. Currently, the GPIF’s unhedged investments mean that the GPIF is essentially short JPY as long as it hold assets denominated in foreign currencies. Moving forward, hedging these investments means the GPIF will deploy long JPY positions. This is a small, but meaningful change for a key player in Japanese financial markets.