Judging by asset prices, investors are no longer concerned about a Marine Le Pen victory in Sunday’s French election.
As of writing, at 05:20 GMT on Friday morning, the euro is buying almost 1.1 US dollars (EUR/USD 1.0989) and is at its highest level against the ‘greenback’ since November-9th, the day of Donald Trump’s surprise election victory.
Against the Japanese yen, the euro has made new 4-month highs today, reaching 123.66 a little after midnight. EUR/JPY now targets the big 124 level – last December’s high and possibly the only legitimate form of technical resistance in the exchange rate until at least 129.
Against the Australian dollar, the rate of euro appreciation has been even steeper than against the dollar or yen. Moves in EUR/AUD in the past three days have been near vertical and, with rates now above 1.49, have moved the exchange rate close to 8-month highs. The Australian dollar continued to tumble today following heavy falls in recent days on the back of worse-than-expected economic data, falling commodities prices and expectations for a reduced Australian interest rate premium over the US.
How about European equities?
Well, those are soaring too. At 3629, the Euro STOXX 50 index is at its highest since August-2015 and has risen more than 5% in the past eight trading days.
In sovereign debt markets, the premium demanded by investors for holding French 10-year bonds over their German equivalent (German debt is considered the safer investment) fell yesterday to a 6-month low of only 37 basis points, indicating a lack of concern over France’s political situation.
Le Pen Stumbles in Television Debate, Markets Give Her No Chance
Almost all of the current euro market buoyancy can be attributed to one factor – a heavily reduced likeliness of a non-mainstream or populist candidate becoming the next French president.
With Jean-Luc Mélenchon’s defeat in the first round of voting on April-23rd, that left only Marine Le Pen – the leader of the Front National party and an ardent EU sceptic – as a risk to political and economic stability in the eurozone.
Markets were thrilled when the centrist candidate Emmanuel Macron pulled in a higher percentage of the first-round vote than Le Pen and now, following a live television debate between the two in which most believe Macron was the clear winner, investors are dismissing the possibility of an upset and are scaling back on their euro hedges.
Opinion polls in recent days show Macron holding something like a 20-point lead over his rival and the prices at European bookmakers now suggest a 90% probability of him being victorious on Sunday (Macron is a general 1/9 chance with bookmakers, Marine Le Pen at 6/1).
Macron Win Likely Priced In, Euro Vulnerable to a Shock
With prices in European financial markets as they are, it is likely that an Emmanuel Macron victory in Sunday’s election is largely priced in. This means that holders of euro currency shouldn’t expect much in the way of euro appreciation when the result is called, if indeed Macron is the winner.
If, on the other hand, Marine Le Pen does surprise the world, it will be fireworks to say the least.
In February, US investment bank J.P. Morgan said in a note to clients that a victory for Le Pen could result in a 10% fall in the EUR/USD exchange rate, but with prices now several percent above those in February, any fall could go beyond their original forecast.
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