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Risk on following French election results

The French National Assembly and decisive vote at the weekend had a surprising result.

In the first round of voting, the order was far-right, leftist coalition and ruling party. This time, however, the power structure changed to the left coalition, the ruling party and the far right, thanks to the effect of the alliance between the left coalition and the ruling party forces, which showed a sharp change in about a week. And none of the forces exceeded the majority. Furthermore, the left-wing coalition and the ruling party, which had worked together in the elections, are now seen as difficult to form a coalition government because of their divergent political beliefs. It is likely that the left-wing forces led by Melanchthon, an unknown quantity for the market, will take power.

In this chaotic situation, French bonds and stocks are expected to sell off in European markets at the start of the week. Risk aversion triggered by the French sell-off is likely to be a cause for alarm.

On the other hand, the trend in the dollar market has been tilted towards a weaker dollar since last week. The slowing trend in US inflation and the impression of a cool-down in the US jobs report at the end of last week have led to widespread market expectations of two interest rate cuts before the end of the year. Although it is uncertain, the possibility of a return to a weaker US dollar after the political developments have run their course has been pointed out.

As for the dollar/yen, the yen seems to be steadily weakening no matter what happens. Rising interest rates in Japan will be difficult and a Trump presidency will lead to higher US interest rates.

The weekend jobs report came in below market expectations, which weakened the dollar, but the margin is too large for a negative 0.1-point reading, which could be nothing more than expectations or calls for the Fed to cut interest rates.

Volatility in the market is decreasing just before the summer holidays, and the slightest news can cause a big swing in price movements. It is likely that the market will either remain flat or move lazily one way or the other.