French election race tightens, EUR languishes - AmpGFX
According to Greg Gibbs, Director at Amplifying Global FX Capital, the first-round vote on Sunday 23 April is a wide field and expected to be a close race.
Key Quotes
“The National Front’s Marine Le Pen (Nationalist, alt-right), the most dangerous candidate for the stability of the EUR, is ahead in the opinion polls with 24%. But the most supportive candidate for the EUR, Emmanuel Macron, leader of the En Marche! Movement (centrist) is just behind with 23%.”
“Not too far behind the two favourites are Francois Fillon (The Republicans – right) – 18.5% and the fast improving Jean-Luc Melenchon (Unsubmissive France – leftist) – 18.0%.”
“No candidate is likely to win a clear majority in the first round, sending this election to a final run-off between the top two candidates from the first round on 7 May.”
“Le Pen may win the first round, but she is a polarizing figure, and many of those that do not vote for her in the first round are expected to go to the alternative candidate.”
“As such, betting markets are favouring Macron as winning the second round. Nevertheless, from a peak of 70% probability of victory on 26-March, Macron has slipped back to 57%. Le Pen is given the second highest chance of victory, currently 26%, up from around 24% in late-March.”
“The uncertainty dragging on the EUR can be seen in the options market. One-month options now take into account both rounds of the election. One month vol has jumped to 12.5%, above 3mth historical vol of 7.2%. The one-month 25 delta risk reversal has fallen to -3.7% (a higher cost to protect against downside risk for the EUR).”
“The USD has struggled since mid-March as some of the confidence in the Trump administration has faded and the Fed has sent mixed messages. Some fall in global yields and higher geopolitical risk has supported JPY and Gold. However, the EUR has noticeably lagged its peers (JPY and gold) since 27 March (around the time confidence in a Macron victory peaked).”
“The French – German government bond yield spread that had been narrowing over the preceding month, started widening again since 27 March, consistent with the turn down in the EUR.”
“However, part of the fall in EUR can be accounted for by dovish rhetoric from key ECB council members and a lower than expected CPI inflation report in March.”
“Earlier in March, after the ECB meeting on the 9th and some stronger survey data, the EUR gained as the market focused on the prospects for reversing extraordinary policy easing in 2018. Several ECB members have emphasized in recent weeks that it is premature to change policy guidance.”
“The EUR may continue to be hemmed in ahead of the French election, with the threat of a deep fall in the unlikely but possible event of a Le Pen victory.”
“If Le Pen gains more than a third of the first round vote on 27 April, and Macron was to under-perform and slip into third spot in the first round, the EUR might build in more substantial risk and fall to new lows. However, if Macron were to make it to the final round, polling close to Le Pen in the first round, EUR might strengthen as he would be a clear favourite to win the second round.”
“Overall, the EUR has proven very stable over the last year, despite its negative rates policy. The market appears to be quite forward looking and willing to see upside for the EUR as the region’s economy gains momentum.”