The French Presidential election goes into its first round of voting this Sunday, April 23rd and in its last week of campaigning the contest is a toss-up. The race is coming down to four candidates - the far-right Marine Le Pen, the independent Emmanuel Macron, the centre-right François Fillon and the left-leaning Jean-Luc Mélenchon who has mounted a late-stage comeback to pull within striking distance of the other three.
According to the latest polls, only four percentage points separate the front runner (Ms. Le Pen) from the number four spot (Mr. Mélenchon). Given the massive inaccuracy of political polls in Western democracies over the past two years, we as traders have to assume that each candidate is basically at 20% support and that each candidate has a legitimate chance to move to the second round of the Presidential Election. (Given the four-way split in the vote, chances are very low that any candidate will capture 50% or more in the first round).
Therefore, we thought it would be useful to lay out the potential scenarios and their impact on EURUSD ahead of the voting this Sunday.
The Best Possible Scenario for EURUSD - Le Pen fails to advance.
Although her support has been rock solid at 23%-25% ever since polling began, Ms. Le Pen is THE existential threat to the euro and any failure on her part to win a second round runoff would create a massive relief rally in the EURUSD. Ms. Le Pen’s hostile attitude towards the European Union and to the single currency itself has been the primary reason for the euro's underperformance this month. Should she be eliminated it would not matter much who would be in the second round (even the left-leaning Mr. Mélenchon is seen as a much smaller threat) because from the market’s point of view the idea of the EU and the euro would be preserved and the single currency could rally to 1.0900-1.1000 level on massive relief flows.
Second Best Scenario for EURUSD - Le Pen versus Macron.
Emmanuel Macron, the former Socialist finance minister, has managed to run a remarkably astute campaign by positioning himself as an outsider and as an agent of change that would bring fresh ideas to governing that will transcend the usual right/left schism which dominated much of France’s post-war politics. In head to head polls, Mr. Macron has consistently enjoyed a 20% plus lead against Ms. Le Pen and is the strongest candidate against her in the second round run-off. This scenario, however, is not without risk. Mr. Macron is a relatively unseasoned politician and is, therefore, subject to possible mistakes on the campaign trail.
With just three weeks to go until second round voting, any faux-pas could cost him dearly. Mr. Macron also comes to the national stage with a very unusual life story. His wife is 23 years his senior and was, in fact, his former teacher in high school. The Macrons have been very open in addressing their non-conventional marriage in the French press, but given the large presence of Russian backing of Ms. Le Pen’s bid, the prospect of some “bombshell” fake news out of Moscow’s propaganda machine could upend the race in its final days. Still, a Macron/Le Pen contest will be seen favorably by the market and the EURUSD could see a 100+ pip rally on the Asian session open as election results filter in.
Second Worst Scenario - Le Pen versus François Fillon.
Although he was seen as the frontrunner when the race started, the centre-right candidate François Fillon is now viewed as a wounded horse. Mr. Fillon, who is a career politician, has been embroiled in a corruption scandal involving his wife. Mr. Fillon remains under formal investigation on multiple counts, including embezzlement of public funds on charges that he paid his wife and children money for work that they did not do. Mr. Fillon has been under a black cloud throughout the campaign trail but has refused to abandon his run and has managed to stabilize his support at about 20%. Mr. Fillon is certainly more vulnerable against Ms. Le Pen but his one saving grace is that Ms. Le Pen herself is now under investigation for her own fake jobs scandal involving deputy staff. She has refused to meet with magistrate until the election ends, but her ability to hit Mr. Fallon in anti-corruption charges will be limited. A Le Pen/Fillon contest is likely to produce caution in the market with EURUSD rallying only slightly on such news.
The Worst Scenario - Le Pen versus Mélenchon.
Until just a few weeks ago, the prospect of a far right/far left contest for French Presidency seemed inconceivable. But Jean-Luc Mélenchon - an old hand at French politics, and an excellent debater, has been able to mount a surprisingly strong run garnering nearly 20% of support in pre-election polls. Both Mr. Mélenchon and Ms. Le Pen are staunchly anti-European union though Mr. Mélenchon is not as doctrinaire in his views. Still, he favours a 90% tax on incomes above 400,000 euros and broad expansion of the welfare state. Perhaps nothing has scared the market more, than Mr. Mélenchon’s rise from obscurity.
His anti-establishment message is resonating with the young, but it remains to be seen if his late surge will be able to carry him into the second round of voting. Still, as Pierre Gattaz, the leader of a French business group, told journalists recently, the choice between Le Pen and Mélenchon would be between “economic disaster and economic chaos.” The EURUSD would no doubt tumble badly on such an outcome and it is not at all inconceivable that the single currency could head towards parity even before the second round votes are cast as markets begin to price in the prospect of Eurozone fracture.
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