The French elections are one of the most potentially destabilizing events for the markets this year. The first round of the elections is on Sunday, April 23. The top two candidates from the knock-out round will battle it out in a second ballot on May 7.
As the election date nears, the outcome has become less predictable and recent polls have shown that the race is tight between centrist Emmanuel Macron and far-right Marine Le Pen. But a recent surge in ratings by far-left candidate Jean-Luc Melenchon has broadened the competition. Meanwhile, right-winger Francois Fillon has shown incredible resilience despite some personal scandals. The race has now become a four-way split and either of the four candidates could now potentially win the first round.
It is highly unlikely that one candidate receives more than 50 percent of the vote in the first round to win the presidency outright. Therefore, the two candidates with the highest share of the vote in round one proceed to a second round of voting.
The last official poll for the first round will be published on Thursday April 21 and it could cause some volatility in markets.
Macron is currently the favourite to become French President and has been edging ahead on the polls to win in the first round of voting. But with only a 1 percent lead over Le Pen, the outcome is still very unpredictable. Meanwhile, Fillon and Melenchon have closed the gap in recent days and either one could conceivably take one of the top spots. It is perceived that a Melenchon – Le Pen face off in the second round would be the least market-friendly outcome and would have a negative effect on the euro. But of course a change in leadership is likely to have an impact on the value of the single currency, whether that is a strengthening or a weakening influence.
Predictions so far are that Macron and Le Pen would face off in the second round, with Macron likely winning the presidency outright in such a scenario. The euro would most probably rally on such a result.
Le Pen’s percentage in the first round is important. If she wins the first round by more than 30 percent of the vote, it will considerably increase the probability of her winning the presidency outright and the euro will likely tumble on this outcome in the first round of elections. While many do not predict Le Pen to become president, such a black swan event would have a big negative impact on the euro as it would create great uncertainty in the markets because Le Pen is anti-euro and plans to take France out of the euro and potentially out of the EU by holding a referendum.
The case of a Frexit would not be the same as Brexit, since in the latter, the British pound remained as the UK’s currency after the referendum vote to leave the EU. A Frexit would be different because it would mean moving away from the euro to a new currency, most probably back to the French franc. Such an event would create further uncertainty in the markets since it could cause a bank run as depositors in French banks would withdraw their euros and consequently this may cause systemic problems in the French banking system.
A Le Pen victory could see the euro tumble to test parity with the dollar. Alternatively, a Macron win could cause the euro to rally to its year-to-date high of $1.09 and continue the year towards the 2016 high of $1.16.
Origin: XM
