Unless the roughly 25% left wing supporters of Jean Luc Melenchon come out and vote for his euro-skeptic counterpart on the right, Marine Le Pen will be utterly clobbered by Emmanuel Macron on Sunday. A Macron win is seen sending the euro to 1.10 and possibly to 1.11 if the market overreacts on the upside.
Rahul Khanna, a Forex strategist for TraderMade, thinks Macro pushes the euro higher against a basket of currencies. It is now trading at 1.09 to the dollar.
“A Macron win has the euro rise across the board with EUR/USD and EUR/GBP targeting 1.1050 and .8650 respectively,” he says, but with one major caveat. Macron has almost no political support in Parliament. His party En Marche! is brand new. If it can be called a splinter group from the ruling socialist party of Francois Hollande, then that party has no pubic support either. Moreover, a sizable majority of Melenchon and Francois Fillon voters said they are not voting in Sunday’s election at all, meaning that Macron’s win will look pretty, but France is still divided on issues of economic and immigration policy.
The iShares MSCI France (EWQ 41,41 -0,19 -0,46%) was up 1.10% in early afternoon trading on Friday, but this may be a “sell on the news” story come Monday. Volume was low in the big French ETF today.
Moreover, the establishment parties are “widely believed to lose the majority in the parliamentary elections,” says Khanna.
Barclays Capital warned of this on April 24, as we advised our readers here.
Volatility is likely to be very high heading into the weekend and at the start of next week given that forex brokers are already adjusting their margin on the euro related currency pairs, with some fund managers preferring to take some money off the table now.
According to a survey by the Betelsmann Foundation, most people in France say they are unhappy with the direction the country is heading. Macron will have to convince them otherwise. This dissatisfaction ultimately led to Le Pen’s popularity this year.
Local pollsters at Odaxa said that at least 25% of the French electorate will not vote on Sunday.
Should Le Pen surprise, a weaker euro and a falling EWQ are a given.
You’d see a “mass exodus of capital into safe havens, as the market will focus on a possible weakening of the European Union,” says Khanna.
French bonds will take a hit, followed by Italian bonds, many fixed income investors tell us. The Japanese yen, Swiss franc and U.S. dollar would gain, while the British pound would likely be punished as well. Riskier assets in emerging markets would see knee-jerk reactions, with more sellers than buyers.