Currency markets in grip of French elections

The unrest in the world of currencies has increased significantly in the run-up to the French presidential elections. The considerable drop in the euro of the past two weeks is the start of a turbulent time in which it’s sensible to be on the safe side.

During the second half of March, the euro/dollar exchange rate shot up to its highest level since the American presidential elections. The euro profited from figures of the economic growth that were better than expected, and some economists alluded to a rate hike by the ECB being close. Since then, the sentiment has completely turned around. Within two weeks, the euro dropped by more than three per cent. ECB President Mario Draghi stressed that a rate hike is still a long way off. That pressures the euro. Moreover, the focus has shifted to the French presidential election that may herald an uncertain future for the euro.

Eleven candidates and two rounds
The first round of the French election process will take place on Sunday 23rd April. Eleven candidate will stand for election. If no one wins a majority, (50%) of the vote, then another round will take place two weeks later (7 may) between the the two candidates who had the most votes in the first round. The chance of a second round taking place is big, as the most popular candidate from the polls got barely a quarter of the votes. The reformist Emmanuel Macron (25.3%) has a slight lead over populist Marine Le Pen (25,1%).

Although mutual differences might be very small in the first round, Macron is the clear favourite in the second round. Polls show that Le Pen will get less than 30 per cent of the votes in the second round. According to pricing on option markets, that percentage might even be closer to 20 per cent. The majority of the French probably wants to prevent a prime minister who wants to trade the euro for the franc as soon as possible. Think tank ‘Institut Montaigne’ calculated that the economic damages of leaving the euro could be more than €180 billion euro in France. 

Yet it hasn’t been ruled out that Le Pen could come out on top, because polls also failed to predict the result of the Brexit referendum and the American elections. On currency markets, a victory for Le Pen would result in the euro dropping until it has the same value as the dollar. On the other hand, the euro could go towards $1.10 when Macron wins. The difference between $1.00 and $1.10 might not seem like much. However, on currency markets – where price differences are expressed in pips (four numbers behind the decimal) – that is a difference between day and night. 

These kinds of fluctuations also affect companies that do business across the border. A good order might be less good if the actual profit is ten per cent lower because of currency fluctuations. It could affect profit margins considerably. For companies, it’s more important than ever to cover themselves against currency fluctuations. Because of the increasing uncertainty in the run-up to the French presidential elections, the price of insurance has increased significantly. The most important lesson of 2016, however, is that it’s more sensible to cover the risk for a high price than blindly hope for a good outcome. It’s not without reason that large parties have been working for some time now on protecting themselves against new shocks on the currency market.