Volatility in the euro has soared to the highest levels since the weeks before the Brexit vote as investors grapple with the risk of a populist triumph in France’s presidential election.
The first round of voting next Sunday is forcing investors to focus on a presidential race that opinion polls suggest will see Marine Le Pen, the far-right leader of the National Front, through to the second-round run-off on May 7.
While the odds of Ms Le Pen, who wants to pull France out of the euro, triumphing in the second round remain long, investors are uneasy at the fluctuations in the polls, particularly the recent momentum generated by far-left candidate Jean-Luc Melanchon, who has vowed to renegotiate the country’s relationship with the EU.
“The risk is that the far left and the far right make it into the second-round run-off,” said Kathleen Brooks, strategist at City Index. “Although this outcome still has a slim probability, the market is showing signs of nervousness about a shock result from the French election.”
April has seen a surge in the cost of insuring against a significant swing in the euro against the dollar and the yen over the next month — a period that covers both rounds of the election — as candidates begin their final push for votes.
Analysts at Nomura noted: “One of our highest convictions in the final weeks of the election is hedging flows are likely to weigh on [the euro] and push election-dated vols higher.”
Although portfolio managers and traders are wary of another populist victory, there is also strong appetite to buy the euro and European assets if favourite Emmanuel Macron or the centre-right’s François Fillon prevail.
A victory for either would drive positive investor sentiment towards the eurozone, sending the euro to $1.15 from current levels of about $1.06 by the end of the year, according to analysts at JPMorgan.
Willem Verhagen, senior economist at NN Investments Partners, said: “If the political risks don’t materialise, you have a positive outlook and a recovery support by domestic demand.”
By contrast, victory for Ms Le Pen on May 7 could see the euro tumble to 98 US cents in a matter of weeks, JPMorgan forecast. The European currency has already fallen from slightly more than $1.09 at the end of March, falling almost 3 per cent this month against the yen, one of the most favoured haven assets, while the spread between French and German 10-year yields has widened.