How big of a risk is the French election for the markets?
The French election is a major event that has the ability to create serious shock waves across the financial markets. With recent polls showing a fierce four-way battle between four candidates, and millions of French voters still undecided, uncertainty remains a key theme. The growing threat of Eurosceptic parties gaining ground could deal a symbolic blow to the stability of the European Union, which may ultimately spark waves of risk aversion across the board.
Which is the best tool to track French-election market risk? French bonds? CAC-40? Polls?
Investors may turn to the CAC-40 and the EURJPY currency pair to track the French election market risk. Although polls remain a popular choice, they have been have been incorrect in the past and could be proven wrong again; the Brexit shocker and Trump’s presidential victory are prime examples.
Polls are forecasting a very tight race among the main four candidates in Sunday’s first round: how low could EURUSD go in case of a Le Pen vs Mélenchon showdown in the second round?
A Le Pen vs Mélenchon showdown may be a nightmare scenario for the Euro that triggers a sharp Brexit style depreciation. The EURUSD could stumble to near parity as investor jitters mount over a potential Frexit situation and uncertainty over the future of the French economy builds.
And how high could the EURUSD rally if Fillon vs Macron was the outcome of the first round?
The EURUSD could receive a welcome boost in the event of a Fillon vs Macron outcome, since the threat of Eurosceptic parties destabilizing the unity of the Eurozone will be out of the picture. A sharp rally towards 1.09 (and potentially higher) is a possibility, with the trajectory of the EURUSD turning bullish.
Could the French election have a GBP-Brexit-type effect on the EUR?
In the event of a Le Pen vs Mélenchon showdown, the EUR may find itself exposed to extreme downside shocks similar to the GBP-Brexit effect. A Le Pen victory could potentially send larger tremors across the financial markets than Brexit!
Should traders prepare for important gaps in the Euro on the post-election Monday openings?
With uncertainty still a major theme in the French elections, traders should expect the unexpected - and that includes potential gaps in the Euro post-election. Volatility may reach explosive levels, especially if markets are served up a shock election. Investors should keep diligent as gaps could be expected on both the EURUSD and EURJPY.
Where would capital fly in case of a EUR meltdown if there was a Frexit? German bonds? USD? Other currencies?
In the event of a Euro meltdown, the flight to safety may boost attraction for safe-haven investments such as Gold, Dollar and the Japanese Yen. Gold is already supported by the ongoing geopolitical tensions, and a EUR meltdown could inspire bulls to send Gold prices towards $1300 and potentially higher.