Fundamental Analysis

French Elections: Round 1

Typography

On Sunday, French citizens are called to elect their government leader, but the final outcome is unlikely to be sealed on that day. According to the opinion polls, there is no candidate gaining the absolute majority, so a second round between the two leading candidates is very likely to be held on the 7th of May.

A couple of weeks ago, the leading candidates were three: Emmanuel Macron, Marine Le Pen, and Francois Fillon. Nevertheless, following a strong performance in the TV debates, left-wing candidate Jean-Luc Melenchon enjoyed a stellar rise of support. His program displays a similar Eurosceptic stance to Le Pen’s. He advocates for holding a 'Frexit' referendum as well. Therefore, a run-off between him and Le Pen seems to be the biggest risk scenario for the financial world.

If something like that takes flesh and bones, we expect the euro to sink as investors will likely price in a much greater risk of European disintegration. A general risk-aversion mood is likely to dominate as well. Safe-havens like the yen are likely to benefit, while equity markets, especially European indices, could take the down road. The other side of the coin is a Macron - Fillon second round. In this case, the opposite market reaction may be observed, as this run-off combination may eliminate the risk for any 'Frexit' referendum.

However, at the moment, polls suggest that the most likely outcome is for Macron and Le Pen to make it to the second round, with the former winning by a large margin. In general, Macron is seen as the winner against any other of the candidates. So if Macron makes it on Sunday, this could cause a market relief and the common currency may open Monday with a gap up. In the less likely scenario of him being kicked out, the only combination that could be seen as relatively pro risk is a Fillon - Le Pen run off, given that polls give the final victory to Fillon. In a Fillon - Melenchon race, Melenchon is preferred.

EUR/JPY is one of the best proxies to play this election in our view. At the time of writing, the pair is trading near the support level of 117.00 (S1). We believe that due to the elections on Sunday, the pair may enjoy a quiet Friday session in the absence of any surprise news. If Sunday’s combination favors a risk-averse mood in the financial community, the pair is possible to tumble and perhaps challenge the psychological territory of 115.00. On the other hand, a pro-risk result could cause the pair to rally and break the downtrend line taken from the peak of the 13th of March. This could be the trigger for a short-term trend reversal.

Of course, much will depend on who gets the first place in the aforementioned combinations, and by how much margin.

As for today’s events:

During the European morning, we get the preliminary Markit manufacturing and services PMIs for April from several European nations and the Eurozone as a whole. Given that investors are likely to be on the edge of their seats for Sunday’s outcome, we don’t expect a major euro reaction from these releases.

In the UK, retail sales are forecast to have fallen somewhat in March, which could cause the pound to erase some of the gains it posted after PM Theresa May called for snap elections.

From Canada, we get CPI data for March. Expectations are for the headline rate to have declined somewhat, while no forecast is available for the core rate. The nation’s Markit manufacturing PMI for the month indicated that manufacturers raised the prices on final products at the steepest rate in three years.

So, although temporary factors may have dragged down the headline rate, the core rate may have remained unchanged or even ticked up, which could prove CAD-positive. USD/CAD could correct back below the 1.3455 (S1) support and perhaps challenge as a support the prior downside resistance line taken from the peak of the 9th of March.

From the US, we get the preliminary Markit manufacturing and services PMIs for April, and existing home sales for March.

We have several speakers at the G20 meeting and the IMF/World Bank conference, including ECB President Mario Draghi and ECB Board member Benoit Coeure.

EUR/JPY

Support: 117.00 (S1), 116.45 (S2), 115.75 (S3)

Resistance: 117.85 (R1), 118.45 (R2), 119.00 (R3)

USD/CAD

Support: 1.3455 (S1), 1.3425 (S2), 1.3345 (S3)

Resistance: 1.3500 (R1), 1.3535 (R2), 1.3600 (R3)

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FXGiants
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