Vive la France! The Election and the Euro

Unless one candidate can garner more than 50% of the vote in the first round of elections, French voters will go to the polls twice to elect their new leader.  The two candidates that score the most votes will go head to head for the top spot on the leadership podium on May 7.  France is a representative democracy, the President is elected directly by the citizens, while the two- chamber parliament, comprised of the National Assembly and the Senate, is voted in by local constituents and an indirect electoral college respectively. Between the President and Parliament, sits a Prime Minister (PM). Nominated by the President, the PM answers to Parliament and requires a majority consensus to take the position.

It is a unique political landscape, and it yields some interesting opportunities. In a system where Parliamentary and Presidential elections are completely removed from one another, Cohabitation (a President and Parliamentary majority that represent different parties) is a very real possibility. The candidates represent a very mixed bag of ideologies, plans for the economy and reforms for their constituents and this election has captured the attention of the international community.

In order to assess the potential outcome and the effects on the currency markets, it would be useful to get a look at the candidates and their corresponding ideologies and policies.

Francois Fillian (Les Republicains)

An advocate of returning sovereign powers to member states, a win for Fillian could increase investor confidence in Sterling. A French President against an EU supra sovereign state is unlikely to push for a hard Brexit.

A debate in early April saw Fillion’s approval ratings rally, topping 15% – placing him above staunch nationalist Marine Le Pen. That provided a boost to EURUSD and it is predicted that his ratings are likely to remain buoyant should he make it to the second round of voting ahead of Le Pen. A win for Fillion, with his solid conservative views, would put an end to the risk premium currently priced in EUR (it has fallen 4% against the Dollar in the last year), and allow the currency to find firmer footing.

Victory for Benoit Hamon (Socialists)

British voters will recognize this left leaning individual who shares some of Corbyn’s ideology. The ex-education minister plans to trim down a 35-hour working week to just 32 and provide a universal basic income. Sound too good to be true? The French people certainly think so, and he’s expected to be eliminated during the first round of elections. His supporters, however, may well provide a welcome boost to independent candidate Emmanuel Macron. If the tables do turn and Macron looks to gain traction, the market response…

Marine Le Pen (Front National)

This former lawyer has made great strides in softening her party’s image. With a staunch nationalist sentiment underpinning much of her rhetoric, it is widely believed she will call her own independence referendum should she win. As such, a victory for Marine Le Pen could see the trading bloc lose its second and third biggest economies within a year or two of one another.

It is a possibility that has seen risk premiums priced into the Euro in recent months. The markets seem particularly fearful of this event, and growing uncertainty should she win, could certainly inhibit consumption and business investment.

Should France leave the trading Bloc, it would have to revert to the Franc, which would lead to relative devaluations of the currency and short-term issues for the French economy.

Current polls suggest Le Pen’s popularity will carry her through the first round of voting, but don’t reflect the same opinion for the second round. That said, investors are all too aware that polls have been wrong before – no one saw Brexit or a Trump presidency as likely until the closing of the votes. Should she surprise the pollsters and win, then we would likely see further Euro depreciation and rising inflation, driven in part by the boost such a win would give to other nationalist movements in countries such as Germany, which also has an election pending this year. That being said, pundits were prepared to eat their pencils if the dollar didn’t nose dive on the election of Trump, it left many of them picking wood out of their teeth.

Emmanuel Macron (Independent)

Macron previously served as Francoise Hollande’s finance minister, he is a social liberal who is running as an independent centrist. The polls show him defeating Le Pen by a wide margin should they run against one another in the second round, however we have learned not to blindly trust the polls, voters are fickle and their voting can turn on a whim.

The election of Macron, who does not subscribe to an austerity-driven Eurozone would certainly stir the markets. His desire to make the EU function at a higher level and his disdain for the current performance of the Euro could make for some interesting times and perhaps, some radical changes in economic policy if he gets into power. He believes that the Euro has not “provided Europe with full international sovereignty against the dollar on its rules and it has not provided Europe with a natural convergence between the different member states. He has stated that the euro in its current state will be dismantled within 10 years.

The bottom line is that markets will move regardless of who is elected, and while we can guess as to how the various contenders will act with regards to economic policy, we can’t assume that they will follow through with their plans. Political rhetoric’s is designed to win votes first, policy implementation by the incumbent then follows; and it may not look like what was on their agenda. This coupled with events on a global scale such as the Syrian conflict, Trumps, shoot from the hip economics and Brexit should keep the currency market volatile in the coming months.

 This is a guest post written by FXTM