This Sunday’s French Presidential race is a massive event for the EUR, and the significance has not been lost on capital markets with German Bund yields’ trading atop of this year lows.
This latest Ifop poll puts Macron and Le Pen each on +23%, just +3% ahead of Fillon and the far-left Melenchon.
The spread between French and German 10-year bond yields – another indicator of market worries – is +0.72 bps. In November, the spread was as little as +0.22 bps.
This tight four horse race has thrown various scenarios into play:
Le Pen vs. Macron
This is the baseline scenario that has been dominant for many weeks since Fillon got into trouble. Polls show that these very different candidates are neck and neck.
In the second round on May 7, Le Pen is unlikely to significantly increase her support beyond her base, and voters of the moderate left and right are expected to merge around Macron.
Current polls show him winning by margins of around +25%.
This is probably the markets preferred outcome, which should be a plus for the EUR (€1.1000’ish) and have Bund yields unwinding the past months risk premium rather quickly.
Le Pen vs. Fillon
This two horse race was probably the punters ideal scenario at the beginning of February.
Until Fillon got into trouble, he was expected to beat Le Pen in round two by a good margin. He would still be expected to win, but by a much slimmer majority of around +13-15%.
If voters do happen to stay away in protest of Fillon’s previous antics it will make for an interesting time for Euro capital markets. The extreme-left will still prefer Le Pen, similar to events in the U.K and the U.S.
Expect markets to be very much on edge for this outcome. The EUR will take a hit, as it’s not a foregone conclusion that a “market-friendly” candidate will indeed win.
The EUR will be expected to gravitate towards its 15-year low rather quickly (€1.0340’ish).
Le Pen vs. Melenchon
Quelle surprise and a potential disaster for the Eurozone – if you thought Brexit was a massive issue, this will be a European nightmare scenario.
To many, both are deemed destructive – Le Pen to the E.U and integration, and Melenchon to opening the “unyielding” French economy.
There is no form on this two horse race, and few opinion polls are putting these extreme candidates against each other.
Never forget, the impossible can become a reality – President Trump in the U.S and U.K’s Brexit.
This outcome would be extremely negative for the EUR. The possibility of penetrating parity with some zeal is a reality.
Le Pen falling at the first hurdle
That would be a massive shock. It has always been touted as a race in which she makes it to the finish line on May 7, but loses.
Handicappers believe that a Macron vs. Fillon would be the most market-friendly sub-scenario.
In second place, capital markets would tolerate Melenchon against one of the centrists. However, either Macron or Fillon are expected to easily beat Melenchon.
Eliminating the most contentious candidate in round one would be a massive win for the EUR. Those ‘single’ unit bears will have no cover to hide – EUR to €1.1200+
Timeline of events over the next few weeks:
April 21 – [from midnight] Poll blackout
April 23 – First round of French presidential elections. At 19:00 BST / 14:00 EDT, media is authorized to report preliminary results (Not exit polls, but numbers based on processed ballots – historically an accurate indicator of the final result)
April 26 – Official announcement of first-round results (latest date)
May 1 – Local holiday in France
May 3 – TV debate between the two remaining candidates
May 5 – [from midnight] Poll blackout
May 7 – Second round of French presidential elections. Last polls close at 19:00 BST / 14:00 EDT, with an exit poll result announced immediately.
May 11 – Official proclamation of the new President.
May 14 – [from midnight] End of Francois Hollande’s mandate