Global Head of Macro Strategy
Summary: The French presidential election is up on Sunday, as concerns have suddenly spiked this week on the rising momentum for Le Pen in the polls. Indeed, a surprisingly strong showing for Le Pen in the first-round election this weekend could create gap-risk into the open on Monday, together with a very nervous two weeks ahead until the decisive second-round run-offs. So far, fear levels are only very modestly priced in.
FX Trading focus: Modest existential fears mean gap-risk if Le Pen showing strong this weekend in the first round of the French Presidential election.
The French presidential election was long just so much background noise for me until about a week ago, when our great French macro strategist Christopher Dembik made me aware of the scale at which the polls were tightening, with Macron’s war-inspired poll surge fading and the right populist Le Pen and left populist Melenchon surging consistently in the polls. We will have Christopher on the Saxo Morning Call podcast on Monday morning with his latest thoughts on the election. He had the unique opportunity to debate Marine Le Pen live on French TV recently. A Harris Interactive poll looking at a second round Macron-Le Pen matchup based on polling as of April 4 suggested a possible vote of 51.5 percent for Macron and 48.4 for Le Pen (no, I don’t know what happened to the last 0.1 percent), which is really within the polling margin of error. This has finally shown up on the market’s radar screen over the last few days, although looking at EURUSD implied volatility, the weekly vol only popped from 8% to 10% once the window of the election rolled into view, and 1-month implied volatilities have jumped this week – likely on hedging the election – to just above 9% on Wednesday from well below 8% late last week and they have settled near 8.50% as of this writing. This looks a bit complacent… a President Le Pen scenario would be a powerful antidote to the otherwise Euro-positive narrative after the Russian invasion of Ukraine (once the immediate ill-effects of the war fade…) on the impression that security concerns would bring more EU fiscal unity and integration, not to mention the huge fiscal expansion on the way. EU sovereign spreads are showing a bit more strain – with France-Germany widening to the top of the range since the 2017 – the 10-year spread is currently above 55 basis points – reached a maximum of just under 80 basis points in 2017 and a crazy 189 basis points at the very worst of the EU sovereign debt crisis.
Chart: EURUSD
There is certainly gap-risk for the euro over this weekend if we have a strong surprise – far more risk to the downside on a strong Le Pen showing than to the positive side on a weak one, but would expect the pandemic lows below 1.0650 and possibly 1.0500 to quickly come into play if there is any strong uncertainty or tilt in favour of Le Pen after the poll this weekend. Parity is being thrown around as a possibility in the event of a President Le Pen after the second round on April 24, but value would be getting very cheap at that point.
Next week is an interesting one for FX, with two G10 rate decision next Wednesday – the RBNZ and the Bank of Canada – with both expected to deliver hikes: 25 basis points to take the rate to 1.25% for the RBNZ and a 50-basis point move from the Bank of Canada. Guidance will be important, given the very steep pace of further tightening priced into the curve for these two central banks – the RBNZ approximately priced for a 3.2% rate by year end (!) and the Bank of Canada for 2.6%. By the way, the 5-year Canadian yield has reached its highest level in over 10 years after trading at record lows in 2020. This will administer a massive slowdown on Canadian house price gains in the coming year to eighteen months, as mortgages are generally based on 5-year rates. The same dynamic applies for the US, where the Fed’s intention to step away from MBS purchases has seen a sharp spread widening for the spread of US mortgage yields beyond the 30-year US Treasury bond. The US 30-year fixed mortgage is pushing on 5%!
The ECB meets next Thursday after a recent attempt by key ECB members to keep the outlook for policy from running too aggressively higher. This has failed to tame EU yields, with the German 2-year pinned near cycle highs today – a test lies ahead there for the ECB, but the French presidential election could be the dominant factor depending on this Sunday’s first-round result.
Russia cut its policy rate 300 basis points to 17% in the wake of the powerful “stabilization” of the Russian ruble, but this is irrelevant for foreign exchange except for those Russian exporters receiving fewer rubles now for their hard currency exports. You and I and Russian depositors can’t trade in and out of rubles due to sanctions and Russian capital controls, so the real market rate is a complete unknown and will stay that way until the situation normalizes, if it ever does so. Russia can continue to cut rates if it wants to due to the capital controls as this eases any pressure from the impossible trinity (a country can only control two of the following: free capital flows, independent interest rate policy, fixed FX exchange levels). By freezing all capital flows, the Russian central bank can set the other two levels wherever it wants.
Table: FX Board of G10 and CNH trend evolution and strength.
The Euro is weaker, but still managed to gain from day’s lows today against the yen as the latter obsesses over rising sovereign yields – a bit surprised that there is zero EU existential strain in EURJPY, only a bit in EURCHF. Commodity FX is stumbling rather badly on the consolidation in many commodity prices this week – so far just a breather, but watching chart levels for major pairs.
Table: FX Board Trend Scoreboard for individual pairs.
Some of the USD/commodity pairs starting to roll over – USDNOK can’t decide direction at pivotal levels, but NZDUSD looks a bit ugly – AUDUSD so far still hanging on to its up-trend. Note gold (XAUUSD) trying to make a move again to the upside after multiple recent failures – really needs to clear 1,966 and hold this time if trend-traders are to bite.
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