Is Fillon the Euro’s Secret Weapon?
The last significant televised debate of the French presidential election campaign has reinforced the view that Marine Le Pen’s chances of winning are fading while the prospect of a stronger Euro are seen rising.
According to a snap poll following the debate, Le Pen ranked fourth with only 11% of respondents seeing her as the most convincing (vs 25% for the far left Melenchon, 21% for Macron and 15% for Fillon).
“The overnight results further reflect the trend of the recent polls where Le Pen is predicted to not only loose the second round, but is now being challenged for victory in the first round by Macron,” says Petr Krpata at ING Bank in London.
For the Euro exchange rate complex the implications are incredibly important owing to Le Pen’s stance on the Eurozone and European Union - both of which she would like to take the country out of.
“While still an outside risk event, the falling odds of a Le Pen victory suggests the bar is now very high for EUR to be driven by the EZ risk premium,” says Krpata.
The final debate was key as some candidates have said that they won’t attend the final debate on April 20th, as it is too close to the election.
Is Fillon the Euro’s Secret Weapon?
The question now is, will this debate change the probability of who will eventually win the Presidential election and could this impact the performance of the euro and European stocks?
So with Le Pen’s chances of getting through the first round of the election starting to be questioned, foreign exchange analysts will now have to toy with various other combinations.
The most likely being the resurrection of former favourite Francois Fillon
Although Macron and Le Pen are expected to win the first round, a third of the electorate also told the pollsters that they could still change their vote.
Added to this, Macron’s supporters tend to waver the most.
“This is why it is premature to rule out a place in the second round for Francois Fillon, the centre-right candidate who was considered washed up after a controversy around him paying his family for “fake jobs”. If this election is as wide open as the polls suggest, then Fillon, with his solid block of conservative voters, could still be in the game,” says Kathleen Brooks, an analyst at City Index, the financial spread betting and retail trading brokerage.
Brooks is looking for markets to re-price a Fillon/ Macron second round, with Le Pen out of the picture.
Leighton Vaughan Williams, the odds expert, has pointed out, the polls and bookmakers may have got it wrong.
He mentioned the specific problems with the French election system including:
- the volatility of the French election system,
- the French imperviousness to scandal,
- the unusual youth of Macron that could be off-putting for some voters,
- and the historical vulnerability of independent candidates.
Thus at this stage of the election cycle, the City Index analyst suggests Fillon could be worth a second-look, and Le Pen’s chance of winning might be a bit rich.
French bookmakers have seen French traders betting on Fillon winning rather than Le Pen, whereas the UK bookmakers’ and US see Le Pen beating Fillon.
“If you think that French traders, who are closer to the election, are a trustworthy source, then maybe the market is too optimistic on Le Pen’s chances?” asks Brooks.
What this Means for the Euro's Outlook
What if the foreign exchange markets were to begin pricing a Fillon victory once more.
A Fillon return could see the euro rally in anticipation of a Macron/ Fillon second round, which Brooks believes could see the EUR/USD rate move back towards the 200-day Moving Average at 1.0867.
“We would also note that EUR/USD is approaching key support – the 100-day sma at 1.0624 – and that could also limit further downside. A reduction in the French-German yield spread could also help to further extend gains in the CAC 40, potentially back towards the 5,300 highs from 2015,” says Brooks.
Overall, there is a chance that the market has been wrong-footed by the polls, and Le Pen is not guaranteed a spot in the second round.
“If we are correct, then the political premium that has weighed on the euro in recent months could evaporate, allowing the single currency to stage a decent rally as we move into the second quarter,” says Brooks.
Credit Suisse last week we revised up their three-month EURUSD forecast to 1.10 from 1.03 previously, in effect arguing that given the risk premium still priced for EUR, a Le Pen defeat leaves some upside room for the currency.
While the French election story is going in a pro-Euro direction, the risks are yet to be completely expunged.
The base-case market view remains that the anti-euro populist, Le Pen will likely advance to the second round but will then lose by a 60:40 margin.
“Despite that seemingly wide gap, and that fact that the populists in Holland performed badly at last month's Dutch election, the market appears unwilling to rest easy, given its mistake in doing so before the Brexit referendum and the US presidential election last year.
Credit Suisse argue that there is evidence of a structural EUR short position amongst the global reserves management community, and more evidence of this emerged this week.
When this is unwound expect notable demand for the shared currency to pick up.
