The euro surged in early Asian trading after Emmanuel Macron, investors’ preferred candidate, appeared on track to make it through to the final round of the French presidential election, which opinion polls suggest he will win.
Mr Macron, who supports open markets and France staying in the EU, won 23.7 per cent of the vote in the first round vote on Sunday, according to three estimates for French media based on partial results. Marine Le Pen, the far-right leader who wants to pull France from the euro, captured 21.7 per cent, the estimates show.
Traders’ initial relief that the run-off on May 7 will probably pit Mr Macron against Ms Le Pen was amplified as Jean-Luc Mélenchon, the far-left figure who enjoyed a surge in support in recent weeks, secured just 19 per cent, according to the estimates.
Such a run-off would maximise “the probability that Le Pen doesn’t win because Macron is seen as most capable of capturing centrist voters and had been polling well in the second round in the opinion polls”, said George Saravelos, co-head of currency research at Deutsche Bank.
The euro jumped as much as 1.8 per cent to $1.0921, its highest level since November, as the foreign exchange market opened in Sydney after the weekend. Volumes typically build during the 24-hour trading day, with London still the largest hub.
The prospect of Ms Le Pen capturing the presidency has been the most notable headwind this year for the euro, which has otherwise been lifted by signs that the eurozone economy is finally gaining some strength and the deflationary fears that dominated in the first half of last year are easing.
Signs of an improving economy have already prompted investors to embark on the fifth-largest rotation from US into European stocks since 1999, according to Bank of America Merrill Lynch, and led to speculation that the European Central Bank might signal the end of its bond-buying programme.
That would sharpen the appeal of the single currency, and hedge funds have been busy trimming their bets against the euro, according to recent data from the US Commodity Futures Trading Commission.
However, the euro’s recent performance has underlined the degree to which the political risk surrounding the election has given traders and money managers a dilemma over whether to buy the euro.
Euro’s rise against the dollar, to $1.0921, a five-month high
So far this month the currency has climbed against the dollar, which has lost much of the momentum Donald Trump’s election gave it just as hopes for the eurozone brighten. Yet the nervousness over the outcome can be seen in the euro’s struggle in recent weeks against the yen, which typically acts as a haven currency in the $5tn-a-day foreign-exchange market.
In early trading, the euro soared just over 3 per cent against the yen to 120.81, more than erasing its loss for April
“The euro was trading above $1.08 before Mélenchon’s improvement in the polls,” opening the way for a bigger rebound in the euro, said Jordan Rochester, a foreign-exchange strategist at Nomura. “We expect the euro to finish [Monday] at about $1.0950.”
A final head-to-head between Ms Le Pen and Mr Mélenchon, whose campaign promises included a renegotiation of France’s relationship with the EU, was the one the market feared most. With that risk disappearing, French government bonds are likely to be in demand when they begin trading on Monday morning, investors say.
“As volatility subsides, spreads between French and German yields should narrow,” said Timothy Graf, head of macro strategy Emea, for State Street Global Markets.