It's all about the euro and French elections this week
If we can steer clear of nuclear Armageddon this week, the euro will be where the majority of the action will be.
On the data front, the final March CPI numbers are out Wednesday, and European manufacturing and services PMI's are out Friday. Not a lot but potentially significant nonetheless.
However, what the market will really be ramping up focus on is the first round in the French elections next Sunday.
If there's any doubt left about how the market is looking at the elections, a piece from the FT shows how it's being traded. One month volatility in the Euro is at the highest since the UK Brexit referendum, and the majority of it is coming against the yen.
1 month Euro vols vs JPY & USD
Why is EURJPY top of the vol list?
One reason we've heard about is Japan's holdings of French bonds (OATS), which according to prior analysis from Morgan Stanley, accounted for some 13% of issued bonds. As the chart above clearly shows, that risk has been heavily covered since mid-March. Much bank analysis is suggesting that the pricing of risk is going to continue, and possibly increase further this week.
We've not often seen the euro move on the opinion polls but that might change this week as the focus hones in on the election. Looking at a snapshot of the poll results since March, Le Pen has lost some steam while other candidates have closed the gap.
French opinion poll results
We all know that polls are highly subjective but they can be a pretty good gauge of sentiment. The fact that Le Pen has fallen back a touch suggests that pollsters who were happy to go out on a limb in early polls, may be having other thoughts the nearer we get to the crunch time, and the reality of the situation kicks in.
As much as we like or dislike the opinion polls, you can't ignore the fact that they are the markets only real insight into the election, and so are going to traded whatever they say.
So how do we trade it?
It's all about the risk levels.
1. Le Pen all the way
The highest risk to the euro is Le Pen winning both rounds. That would see the euro collapse, and all those parity calls we've heard about in nearly every euro negative situation might finally come true.
Update 18/04: As Credit Phil aptly points out in the comments, Melenchon is in with a chance too, if we go by the polls, so we can put him in the same risk bracket as Le Pen (He's far left to Le Pen's far right). Ultimately, both of them getting through to the 2nd round is a big euro negative. Otherwise, it's pretty much the same outcome if it's Le Pen or Melenchon in these 3 scenarios.
2. Le Pen wins through the first round, fails in the second
As much as the polls have had Le Pen winning through the first round since they started doesn't mean the euro will ignore her actually getting through the 1st. Expect the euro to drop if she does. But, how far it drops is likely to be determined by how good her results are. If she flies through with a high percentage, expect the euro to head south more strongly on expectation of her winning the second round. If she limps through the 1st round, expect the euro to fall but it may not be such a strong move and could even reverse if the market prices her out of the second round on that weak showing. However, the market now would have just a two horse race into the 2nd and so a huge amount of risk would remain.
If she's beaten in the second round, the euro will naturally fly and it will be aided by a lot of those risk coverers getting out those covering trades and back into euro assets. Expect moves in FX, stocks and bonds as those trades unwind and new money comes in.
3. Le Pen KO'd in the 1st
The most euro positive result of all. Although there's going to be analysis of whoever wins the presidency, the main market focus is on Le Pen and if she fails at the first hurdle, the market won't care who wins as the euro will take off. Maybe after a few days we'll get the markets real view of the result but the main risk would have passed.
The main polls we know come regularly are the Opinionway poll around 10am GMT, and the Ifop poll around 16.00 GMT. Those are two we can set our trading watches to but expect the other polls to gather more attention.
Whatever happens this week will pale into insignificance come next Sunday and Friday is going to be a very important day. It will be the last trading day before the elections so be mindful that we could see some sharp moves all day as the last election covering is done into the weekend. If you are in euro trades then that will be the time to think carefully about whether you want to close them up and re-enter them from Monday. Whatever the result, there's a very high risk of a gap open either way on that Monday.
P.S
And more importantly, it's also St George's day in England on Sunday ;-)
