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Euro Rises to Five-Month High as Macron, Le Pen Lead French Vote

This article was sourced from Bloomberg Markets. Article by Stefania Spezzati.

The euro jumped against the dollar after the first round of the French election showed that centrist Emmanuel Macron and nationalist Marine Le Pen were set to reach next month’s run-off.

The shared currency traded 1.8 percent higher at $1.0920 by 10:00 p.m. London time, paring gains of as much as 2 percent that took it to the highest since November. A place for Macron in the second round avoids investors’ nightmare scenario of a contest between the anti-euro Le Pen and the Communist-backed Jean-Luc Melenchon.

“This is the perfect scenario the market was desperately looking for,” said Sebastien Galy, a macro strategist at Deutsche Bank AG in New York.

Macron and Le Pen both took around 23 percent of the vote, according to the French interior ministry’s latest data based on more than three-quarters of voters. The result curbs risk for the euro zone after a year of polling upsets and political turmoil driving currency volatility, from the U.S. elections to Italian and British referendums.

Hedge funds were seen fading euro gains above $1.09 and have more offers in place at $1.0975 and above $1.10, said traders in London, who declined to be identified because they were not authorized to speak publicly. London trading desks staffed lightly on Sunday evening may leave business to Asian counterparts soon, which could weigh on liquidity, one trader said. The euro climbed 2.7 percent against the yen.

Investor attention will now turn to the second round, for which Le Pen has trailed Macron in almost every opinion poll by a margin of some 20 percentage points. If Le Pen was to produce an upset and become president, the euro would tumble to a 15-year low to below parity with the dollar, in a reaction similar to that seen in the pound following the U.K.’s Brexit vote, according to economists surveyed by Bloomberg.

While the euro has moved as a result of developments in the campaign, French bonds have been the main barometer of sentiment toward the election. The French-German 10-year yield spread reached the widest since 2012 in February before fluctuating in a tight range since then. Given the securities’ sensitivity to political risk, Macron’s presence in the run-off may boost French bonds when they open at 7 a.m. in London tomorrow, according to ABN Amro Group NV.

Analysts Comments

  • “For now, given the wide polling lead Macron has over all other candidates, if he features in the second round, we can assume with a high conviction he’ll be the next President of France,” Jordan Rochester, a foreign-exchange strategist at Nomura International Plc, said in emailed comments
    • “I expect we’ll likely finish at $1.0950 on the day,” Rochester said; market will likely fully price in the outcome of the second round today in favor of Macron
    • The bank enters a long euro position against the dollar and will look to reassess at $1.15
  • “A rise to $1.09/1.10 sounds like a reasonable expectation on the evening,” said Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London
  • Markets already started to price in a positive outcome in the run-up to the elections, which could limit the reaction, Nick Kounis, economist at ABN Amro said in emailed comments
  • “Our model gives a level of $1.12 in the event of a mainstream party win at the second round,” said Valentin Marinov, head of G-10 FX research at Credit Agricole
  • Commerzbank analyst Thu Lan Nguyen expects the projections “to be received positively by the markets”
    • “What is positive is that the voting shares are close to the polls, so this increases confidence in the projections of the second round in which Macron is expected to win easily,” Nguyen said

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BCR team
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