Who Will Win the French Presidential Election run-off vote?

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In line with almost every opinion poll, En Marche! leader Emmanuel Macron and President of the National Front Marine Le Pen both progressed to May’s French Presidential Election run-off vote, having been the two most popular candidates at the first round vote on 23rd April.

Centrist Macron topped Sunday’s vote, gathering a 23.8% share compared to 21.5% for Le Pen. Republican Francois Fillon and far-left Jean-Luc Melenchon were left trailing in third and fourth place respectively with just under 20% share of the ballot each.

The result saw a significant relief rally in the Euro against every major currency. Right in line with our forecasts prior to the vote, the Euro spiked by a little under 2% against the US Dollar following the news that the market friendly Macron had made it through to the run-off election (Figure 1). While this was the most likely scenario going into the vote, markets were clearly wary that either Fillon or our worst case scenario for the Euro, Melenchon, could have sneaked through with Le Pen into May’s second round. Both Le Pen and Melenchon had pledged to hold a referendum on EU membership, and a Le Pen-Melenchon run-off would have considerably damaged sentiment towards the single currency.

Figure 1: EUR/USD (20/04/17 - 24/04/17)

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Source: Thomson Reuters Datastream Date: 24/04/2017

The Euro is now currently trading at around its highest position so far in 2017 against the US Dollar following Sunday’s move (Figure 2). We have also seen a fairly significant relief rally in emerging market currencies. The MSCI Emerging Market index rose over half a percent during Sydney trading on Sunday night, with European currencies, notably the Polish Zloty, Hungarian Forint and Czech Koruna, rallying sharply against the US Dollar. There was also a fairly sizable downward move in the safe-haven Japanese Yen on the reversal in risk aversion, which declined by over one percent during the session.

Figure 2: EUR/USD (April ’16 - April ’17)

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Source: Thomson Reuters Datastream Date: 24/04/2017

 

What will be the result of the run-off vote?

The outcome of the first round means we’re now almost certain to see an election victory for Emmanuel Macron in the second round vote on 7th May. Despite the relative inexperience of the centrist candidate, every opinion poll for a Macron-Le Pen run-off has shown a commanding lead for the En Marche! leader. A survey from Harris on Election Day projected Macron would win the run-off by close to 30% at 64% to 36%, with additional polls from Ipsos yielding a similar result.

Two of the main candidates defeated in the first round, Francois Fillion and Benoît Hamon, have already explicitly thrown their support behind Macron. A number of other senior and influential politicians in France, including Alain Juppe, Manuel Valls and Francois Hollande, have also followed suit. A key date to look out for during the second round campaign will be the head-to-head debate on 3rd May, although even a complete disaster for Macron is unlikely to derail his chances of winning.

 

How will the currency markets react?

The latest bookmaker odds currently give Le Pen around a 16% chance of defeating Macron in May’s vote. We think this is fairly notional, and baring a significant political development, we think Le Pen will be defeated by a comfortable margin in a couple of weeks’ time. Le Pen has been a staunch advocate of leaving the European Union, and given the majority of France remains pro-EU, we think the anti-Le Pen vote is almost certain to prevail.

With financial markets now fully pricing in such an eventuality we’re unlikely to see a significant reaction in the Euro off the back of a Macron appointment. We may see a slight upward move in the Euro, although a less hawkish than expected message out of the European Central Bank’s monetary policy meeting this Thursday could cap gains for the common currency in the immediate aftermath of the announcement.

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