As the polls close in France for round one of the presidential election, eyes will then shift to Asian markets to see how traders express their views on the event.
France’s election process:
April 23rd: 1st Round vote:
May 7th : 2nd Round vote:
June 11th: 1st Round Deputy:
June 18th: 2nd Round Deputy:
The polls in France close at 8pm local time and the counts will continue, before releasing preliminary results at 10pm (6am AEDT). Depending on how quickly the counts are released, we may have a good idea of who is victorious in round one around or just after the FX markets open. Previous elections have sometimes seen a reasonable amount of the votes counted by the time Asia kicks off, so of it is a one-sided event then traders will assume and price the markets accordingly. If it is a drawn-out battle or there are issues with counting, then we are more likely to be in for a turbulent time.
FX Markets to focus are Euro crosses in general but, we’ll be watching EURJPY, EURUSD and EURGBP. A simple way of looking at how markets may react is in terms of Le Pen winning, or no and whether this becomes Euro bearish, or not. As Macron has now been seen to take the lead this week, Euro crosses have moved higher against all majors excluding GBP, which exploded higher following announcement of the UK referendum. As Asian indices, will be the proxy for European indices now (as it is the main event) then we can consider the Nikkei 225 to express risk-on if Le Pen doesn’t go through to round two.
Currently Macron in favoured to win round one but, as we have noticed in polls in recent referendums, they can vary from expectations on the big day and throw a curve ball. The basic theory is that Le Pen is bad for the Euro and her failure to win overall could be bearish for the currency and future investment for France. Yet we would extend this to Le Pen may not be so great for the Euro initially by not winning, yet it could recover anyway. If Macron wins overall, we think the Euro rally would be greater than the Euro sell-off if Le Pen wins for one simple reason. Investors have been bittern twice by consensus views regarding Brexit and Trump and have taken outlier potentials far more seriously and far sooner with this election. Therefore, any downside risks Le Pen may invoke upon the Euro are likely priced in, as well as the fact this is only the first round. For Le Pen to break up the Euro or just take France out of it, she needs to win round 2, build up a suitable government with no in-fighting, hold a referendum within 6 months and get a yes. There are still many hurdles to overcome even if Le Pen wins on Monday and round 2 in May.
Since yesterday’s analysis, EURJPY has broken the bearish trendline and meanders around the 117-117.30 pivot zone. As there is still a complete trading session before the election, we’re only taking a broader look at potential direction and stalling points. The volatility on the day will be tied to surprises and swings in the voting, whereas the direction (or lack of) being tied to whether Le Pen is 1st, 2nd or below. If not in 2nd place then we assume a Euro cross bias and if there are not many surprises then volatility should also be lower.
Another potential trendline lands around the 200eMA which could make a likely profit objective. A break of it further backs up our bias for broader Yen outflows and risk-on sentiment, with the next stop becoming 118.78.
Further out we continue to think that European stock may outperform US in the coming months. The broad stock index for European shares by MSCI shows they are on the cusp of breaking a bearish trendline. Whilst we remain bullish in US stocks, there may not be enough upside potential in percentage terms compared with those of Europe.
On a longer-term basis, we prefer the DAX index but, if, le Pen is knocked out in round one then the CAC could outperform on a near-term basis.