Latest Euro Predictions on French Presidential Elections: The Nomura View

• Pound to Euro exchange rate: 1 GBP = 1.1714 EUR
• Pound to Dollar exchange rate: 1 GBP = 1.2433 USD

The first round of the French Presidential election is less than two weeks away, and recent polls have shown the race broaden into a four-horse affair.

A late surge from far-left candidate Jean-Luc Melenchon and the resilience of the defamed right-winger Francois Fillon have broadened out the competition.

Both Fillon and Melenchon are in third place, neck-and-neck on about 18%, whilst the leaders – Le Pen and Macron -  have languished recently on roughly 24% each.

Given polling margin of error, either of the four could now potentially win the first round.

Markets are taking note.

Since its all-time low on the 17 March, Eurostoxx volatility (V2X) has more than doubled, while the 2yr French-German yield spread widened almost 9bps yesterday and now sits at its widest level since mid-2012.

"Add to that the clear bias towards puts in the 1m EURUSD risk reversal (which from last Friday includes the second round of the French election), now at its most bearish since late 2011, and we have a variety of indicators highlighting the rising political risk," says analyst Robin Wilkin at Lloyds Bank.

The next question for currency traders is how the Euro will react to the first round result, released on Sunday April 24, which despite only being a knock-out round, is still expected to cause some volatility.

Final pre-Vote Poll is Important

The last official poll for the first round will be published on Thursday, April 21, as polls cannot be published on the day before the election.

Historically last polls have shown a maximum margin of error of 3.9% from the final result.

There is rarely a surprise result from the poll on the 21st April – the final poll.

When there has been a large error it has commonly been to overestimate the National Front vote.  

The last poll published on April 21 could therefore cause some volatility in markets.

“What could move markets, however, is if the polls ‘get it wrong’ and over or underestimate the support for either candidates of Marine Le Pen or Mr Macron,” says Jordan Rochester at Nomura Bank.

Early Reports

“Exit polls will be released at 7pm (BST), just one hour before the Sydney FX market opens on Sunday 24 April, with the result known with a high level of confidence by 9pm to 11pm,” says Rochester in a note to clients dated April 11.  

French law dictates that results must be out by 8pm (CEST) – which is 7pm (BST).

“Typically, the result is known with high levels of confidence by 11pm (CEST),” says Nomura’s Rochester.

What can the 2012 Election Teach Us?

Looking back to 2012 four polling companies provided exit poll estimates of at 8pm (CEST).

“Interestingly, they all began by overstating the result for Marine Le Pen (ranging from 0.3% to 2.1%. Over the next two hours they continued to adjust their predictions as the results were counted. There may be several reasons why Marine Le Pen’s initial support was overstated, one of the more likely being that regional polling stations where FN support is higher tend to close earlier,” added Rochester.

Rumours may leak out before 8pm (CEST) as some foreign media companies not covered by French law could carry out their own exit polls and release results as early as 6pm (CEST).

The low expected turnout of 65% (low for France which averages 80%) could favour Le Pen.

What Could Happen to the Euro?

The Euro will look at Le Pen’s first round result closely, according to Nomura’s Rochester:

“EUR will likely trade lower if Ms Le Pen has a higher polling result. If Marine Le Pen fails to gain as many votes as expected from the first round (roughly 25% or so) then the market will likely reduce the event risk for the second round considerably and EUR would rally.”

On the other hand, if Le Pen gains 29% or more of the vote in the first round it will increase considerably the probability of her winning the presidency outright and the Euro will fall.

“If Le Pen wins the first round by >29%. There would likely follow a period of market stress similar to that after the Brexit vote in the UK, but soon enough the market would likely recover as the market will price for a ‘lame duck’ president,” says Rochester.

However the analyst believes the market recovery may not be so swift as it was for Trump and the Brexit vote and there is likely to be a trade further down the line as Marine Le Pen is not pro-markets nor advocating large tax cuts.

Even if Le Pen becomes the next president of France she may not have very much power (“lame duck”) as only two members of parliament are of her party so she will meet stiff resistance from the house of representatives.

It is even possible she might not possess the authority to call a referendum on EU membership which would be up to the courts to decide.

This could lessen the “shock” of her victory and the sustainability of downside for the single currency.

Macron and Le Pen for Second Round

Current expectations are that the lead centrist candidate Emmanuel Macron and Le Pen will make the final runoff on May 7 but polls may shift considerably in the final two weeks.

Given the recovery made by Fillon and Melenchon, however, there is now a chance of a scenario, where one of the two favourites does not make it into the final runoff.

If Macron loses and either Fillon or Melenchon get through to the second round the Euro is likely to sell off on the news as neither candidate has Macron’s mass appeal – one is right-wing and religious and the other is a communist - so it would be easier for Le Pen to beat them.

If Le Pen faces Fillon or Melenchon, “the implied chances of a Le Pen victory are higher than vs Mr Macron, even if still unlikely,” says Rochester.

The second round follows a similar timeline to that of the first round with release times.

During the two-week campaign, polls have previously tightened, but then the favourite tends to win.

Will voters whose candidates fail in the first-round vote for someone else in the second round?

Once the market has digested the polling results of the first round the following question would be whether voters whose candidate failed in the first round decide to vote in the second?

“The general view is that Le Pen is most likely to gain extra voters from Fillon if he falls out at the first round, as both are right wing politicians, however, she is unlikely to receive any votes from other failed candidates,” says Rochester.  

If Marine le Pen wants to become President she will however need to attract some centre-left voter.

This, according to Nomura’s analysts is, “a possibility that is not too farfetched in our view.”

There is also the possibility of a leading politician, or one of the failed candidates, such as Fillon, coming out in favour of Le Pen – in the way that Boris Johnson came out in favour of Brexit. However, we don’t think the comparison is valid.

Market based forecasts based on options volatility show the probability of a Le Pen win (of both first and second rounds) is 15%.  

Euro Forecast Targets

A Le Pen victory in the second round would see EUR/USD test parity, potentially falling to 0.97.

If Macron wins, as is expected by Nomura amongst others, EUR/USD would be expected to rally to continue to a year-end result of 1.15.

Nomura’s base case if for Le Pen to lose the second round.

“When the French election result is released at 8pm (CEST) on Sunday 7 May, barring a poll upset, we expect the market to remove finally the political uncertainty associated in EUR to the French elections and focus fully on the possibility of a taper from the ECB and trade higher,” says Rochester.

For more - please see JP Morgan's predictions for the Euro as France goes to vote.