The euro surged to the strongest in five months against the dollar after centrist Emmanuel Macron and nationalist Marine Le Pen won the first round of the French presidential election.

The shared currency was 1.3 percent stronger at $1.0868 as of 9:01 a.m. in Tokyo on Monday after gaining as much as 2 percent to $1.0937. A place for Macron in the second round avoids investors’ nightmare scenario of a contest between the anti-euro Le Pen and the Communist-backed Jean-Luc Melenchon.

“This is the perfect scenario the market was desperately looking for,” said Sebastien Galy, a macro strategist at Deutsche Bank AG in New York.

First-time candidate Macron was on course to take 23.8 percent of the vote and National Front leader Le Pen 21.7 percent, according to projections from the Interior Ministry based on more than 90 percent of votes counted. The result lowers risk for the euro zone after a year of polling upsets and political turmoil driving currency volatility, from the U.S. elections to Italian and British referendums.

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Hedge funds were seen fading euro gains above $1.09 and have more offers in place at $1.0975 and above $1.10, said traders in London, who declined to be identified because they were not authorized to speak publicly. The euro climbed 2.2 percent to 119.52 yen.

The yen tumbled against all its major counterparts as demand for the safest assets eased as the results became known. Japan’s currency slid 0.8 percent to 109.97 per dollar after depreciating to 110.64, the weakest level since April 11.

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The focus is whether dollar-yen will keep above 110 level at the end of Monday trade after markets reacted with risk-on sentiment by selling the greenback and yen and buying the euro, said Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co. in Tokyo

Investor attention will now turn to the second round, for which Le Pen has trailed Macron in almost every opinion poll by a margin of some 20 percentage points. If Le Pen was to produce an upset and become president, the euro would tumble to a 15-year low to below parity with the dollar, in a reaction similar to that seen in the pound following the U.K.’s Brexit vote, according to economists surveyed by Bloomberg.

While the euro has moved as a result of developments in the campaign, French bonds have been the main barometer of sentiment toward the election. The French-German 10-year yield spread reached the widest since 2012 in February before fluctuating in a tight range. Given the securities’ sensitivity to political risk, Macron’s presence in the run-off may boost French bonds when they open at 7 a.m. in London on Monday, according to ABN Amro Group NV.

Analysts Comments

“For now, given the wide polling lead Macron has over all other candidates, if he features in the second round, we can assume with a high conviction he’ll be the next President of France,” Jordan Rochester, a foreign-exchange strategist at Nomura International Plc, said in emailed comments

“I expect we’ll likely finish at $1.0950 on the day,” Rochester said; market will likely fully price in the outcome of the second round today in favor of Macron

The bank enters a long euro position against the dollar and will look to reassess at $1.15

“A rise to $1.09/1.10 sounds like a reasonable expectation on the evening,” said Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London

Markets already started to price in a positive outcome in the run-up to the elections, which could limit the reaction, Nick Kounis, economist at ABN Amro said in emailed comments

“Our model gives a level of $1.12 in the event of a mainstream party win at the second round,” said Valentin Marinov, head of G-10 FX research at Credit Agricole in London

Commerzbank analyst Thu Lan Nguyen expects the projections “to be received positively by the markets”

“What is positive is that the voting shares are close to the polls, so this increases confidence in the projections of the second round in which Macron is expected to win easily,” Nguyen said

Source:
courtesy of BLOOMBERG

by Stefania Spezzati

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