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The euro is not the way to play eurozone political risk

“That Europe is nothin’ on earth but a great big auction,” wrote Tennessee Williams in Cat on a Hot Tin Roof.

It has been a mixed year for the euro so far, with the currency falling for much of February after rising steadily in January. The pattern could set the tone for 2017, with its series of troublesome political events, including elections in Holland and France. The stakes for the currency could hardly be higher, according to the Bank of Montreal.

“The future of European monetary union is at stake,” argues Stephen Gallo, European head of currency strategy. “The current political environment has been shaped by the obligations attached to EMU membership: acceptance of austerity and bailouts has become the norm . . . attitudes about the future of the EU and EMU have shifted [and] citizens would probably prefer their leaders to keep all their options open on the future of the EU.”

Nonetheless, the prospect of sustained economic stimulus from the European Central Bank will cap the euro’s fall at 7 per cent to 8 per cent against the dollar whatever French and Dutch voters decide, according to Mr Gallo.

JPMorgan, meanwhile, argues that political uncertainty on both sides of the Atlantic should deter investors from “hedging European political risk through the [euro’s] US dollar cross”.

Instead, says the bank’s Paul Meggyesi, investors should position for greater US and eurozone political risk via short positions in the dollar against the yen and the Swiss franc. Shorting the euro should be done via the franc too.

michael.hunter@ft.com