The French election market playbook

There are really four key scenarios that can occur in this Sundays (Monday morning for us Aussie’s) French election and they could really shape the performance of markets like EUR/USD (and EUR crosses), France 40 cash and more indirect markets such as the ASX 200, FTSE 100 cash and gold.

Firstly, it’s important to understand that the first round vote could actually be key in the whole election process and while everyone is fixated on the second round on 7 May, there are permutations of the first round vote that could cause extreme moves in markets this Monday. Here is a very simplistic view of how EUR/USD could react depending on the outcome. One can extrapolate these moves into other financial markets.

Recall, the way French elections system works is the public vote and the two candidates with the most votes go through to the second round. Nice and simple, unlike the US Electoral college system.

Expected times

Keep in mind the polls close on Monday at 04:00 aest (Sunday 20:00 local time), with the first exit polls released shortly after – there is a blackout of exit polls until the final polling station closes. IG will be offering Sunday markets for clients (Sunday markets close at 07:40 aest), so traders can still react to the numbers coming out.

By 06:00 aest (22:00 local time), just in time for the FX open, preliminary results will released and the projections for which two candidates could be headed for the second round run-off will start being issued. If we use 2012 as a guide, 80% of the vote was known by around 07:00 AEST, so the period between 06:00 aest and 07:00 aest could be very volatile indeed, obviously depending on the results coming out.

Popular traded futures markets (S&P 500, US crude, gold, Nikkei) open at 08:00 aest, and IG will also start offering the ASX 200 (Australia 200) and other European indices such as CAC, DAX and FTSE at this time. By 08:30 aest (00:30 local time) we should have a complete picture of the votes.

Implied volatility

If we look at the EUR/USD $1.0700 (at-the-money) ‘straddle’ expiring on Monday we can see this costs around 180 pips in premium. The bottom line here is that the market is expecting a move of 180 points (in either direction) in EUR/USD from current levels of $1.0700. This is where traders can buy or sell volatility structures depending on their view of Monday’s outcome.

Recent polling

Using the elections in 2007 or 2012 as a guide polling was fairly accurate, which of course is something we can’t say about UK and US elections/referendums. Still, it remains somewhat of a lottery which two candidates garner the most votes given there is a mere five point spread between the leading four candidates. Here is  the average of recent polls for voting intensions in the first round, but who goes through will be what drives markets.

  • Emmanuel Macron – 23.8% (independent, centrist, ex-banker, is the establishment choice)
  • Marine Le Pen – 22.8% (far right, has fascist views, importantly is anti- Europe, anti-immigration)
  • Francois Fillon – 19.3% (centre candidate – was the huge favourite, but has had a number of issue including using tax payer funds to pay his wife a salary greater than what Donald Trump gets paid)
  • Jean-Luc Melenchon – 18.8% (far left – likes idea of wealth re-distribution, wants to renegotiate EU-terms, but is not interested in leaving the EMU)

As we can see from the below chart, the bookies have Emmanuel Macron as firm favourite with a 52% probability of winning the presidency on 7 May. Fillon and Le Pen are a close second. That seems logical if we see Macron and Le Pen go through the first round as the various polls have consistently put Macron as having a 30-35 percentage point lead in any head-to-head battle.

(Betting probability of who wins the actual presidency on 7 May – this will obviousy be detemrined by Mondays first round vote)

The playbook

The best-case scenario on Monday

The markets preferred scenario would clearly be a head-to-head battle between Emmanuel Macron and Francois Fillon. This would cause a wave of EUR hedging activity to be unwound and we could be seeing EUR/USD headed into and even above the March highs and onto $1.1000. There would even be scope for the November highs of $1.1100 to come into play, but it seems a stretch to think we will see a move here in just one day.

The likely scenario

Judging by recent polls on who the public want to vote for in the first round, it seems most likely that we will see Emmanuel Macron and Marine Le Pen go through to the second round. The reaction seems unclear given this is the outcome most had speculated on for weeks, but it seems unlikely EUR/USD will break the $1.0500 to $1.0850 range on this outcome. I would however favour EUR appreciation here and a relief rally in the CAC 40 cash, given the polls have consistently shown an easy win for Macron in this battle.

The worst-case scenario

Undoubtedly the worst-cast is an outcome involving Marine Le Pen and Jean-Luc Melenchon in the final round. This is the doomsday scenario, where both anti-globalisation candidates, one on the extreme left of politics goes up against the candidate from the extreme right. Clearly the prospect of Le Pen becoming president increases in this scenario and uncertainty reigns. EUR/USD likely heads towards and even tests parity in this scenario and the CAC will likely open around 8-10% lower – perhaps even lower.

A Fillon vs Melenchon would also be taken as a negative by markets too.

Le Pen vs Fillon

This scenario would likely play out in a similar manor as ‘the likely scenario’. Polls still suggest Fillon would win this battle, with a recently released poll by BVA giving Fillon a 14 percentage point advantage.

Of course these scenarios and the levels detailed are just rough guides, but it gives a sense of the moves expected on the different outcomes.

Other trades worth watching:

EU volatility / S&P volatility ratio – Traders have been buyers of EU vol, selling US vol. Could this change?

EUR/USD 1M risk reversal  – Traders have been buying out of the money put volatility. This is where traders have hedged election exposures

French 10-yr credit default swap (CDS) – No stress here

France / German 2-yr bond spread – Some concern to hold French debt, but spread seems to be holding the 50bp level; When bond markets open I expect EUR/USD to follow this spread closely (algo’s).

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  1. “The worst case scenario ” is the BEST case for the people of FRANCE! ?
    Fuck the EURO and start looking after your own country. Exactly what Australia needs.This bullshit global system is so rigged it needs addressing.
    Solidarity people of France✊✊✊
    Australians have become to selfish to stand united, it’s dog eat dog! Fuck you, I’m all right. The mentality of Austalians as they sell their Ass,country, environment ,kids and grandkids out. ?

      • The so-called “worst case” hasn’t been all that bad for the UK and US markets. Especially when you consider the benefits of doing things differently for a change.

    • Jean-Luc Melenchon will trounce Le Pen in that case. The reality that escapes most comments here is that Le Pen struggles to get much beyond a third of the voters in an scenario.

      • Indeed. French member (right-leaning) of our extended family is astounded by the Australian press coverage of the French election and says it is bizarre in how uninformed it is.

      • A third of French are refusing (saying they are currently uncommitted) to tell pollsters how they will vote… I refuse to believe that is true. I think what you are seeing is a ground swell of discontent, and a real fear that France will become a failed state. In that instance, polls mean nothing – and if I was to speculate, it also means that people are not willing to tell who they will vote for; cringe factor or whatever!!!

        Change is afoot, and everyone is in denial.

      • “Ireland Ethnic groups. Ethnic groups: Irish 84.5%, other white 9.8%, Asian 1.9%, black 1.4%, mixed and other 0.9%, unspecified 1.6% (2011 est.) ” And in 30 years minority? BS, stop trolling.

      • Actually, massive immigration into Eire. Saw an article recently, suggests the reason why there is no public backlash is its from very low base… there hasn’t been any immigration into Eire ever! So many of those visitors are recent arrivals via the last housing boom. Family who were involved had 80-90% Lithuanian and Poles working on their sites. Amazing workers, who put many of the Irish youth to shame. Many of those wanted to go to Uni and bum around for a few years. Manual labour is so blue collar!

        What you really need to know is the rate of immigration now… and project. Other than Dublin (which is mad), the Irish housing market else where has not really recovered.

      • Immigration total (2015) 69,300; (2016) 79,300 out of 4.7 million of which 84% are Irish native. Of the 2016 numbers 31K are from out of the EU.and 21K are Irish native (I imagine returning). Note that these numbers do not take into account emigration (32K Irish and 19K out of EU; net migration +3100) but even then the idea that the Irish will be a minority in 30y, projecting from the current figures, is laughable.

  2. Rod: “Make France Great Again” How?
    T: ““The worst case scenario ” is the BEST case for the people of FRANCE! ” How?
    Fitz: “People are angry.” With the wrong people. BTW the links you provided were no apropos.
    Barry: “Save your country before its too late.” From what?
    Instead of projecting your own problems you should consider what the real underlying problems are: overpopulation, digital economy, automatisation, the headwinds of history… None of these can be tackled indicidually, so I am amazed how you project them on the last actor in the scene. Don´t get me wrong, the EU has problems that need to be fixed, but you seem to think that going to the the interwar period is preferable. But the numbers (GINI, longevity, violence, education, equality…) speak otherwise. In fact, inequality has risen more and faster in countries outside of the EU, so how does that little fact fit with your statements? Food for thought

    • Merely an observation Jas. I didn’t provide any links?? I have seen online the rallies of those 2 candidates and just made the observation. I don’t have any problems, let alone projecting them. Relax, have a nice lie down.

      The “enrichment” is an ironic term referring to the Islamic contribution to French society being “cultural enrichment” according to SJW. The people who indulge in driving trucks over children are referred to in some circles as “culture enrichers”.

      Food for thought.

      • Merely a summary of statements sharing common elements. They fall squarely within the realm of political polarization, rejection of facts, attack of experts, etc. I find them both fascinating and scary, in equal measures, because of the lack of context, facts and argumentation. It is tribal, appeals to the brain stem, and is a repeat from a time I care not revisit. You don´t find it worrysome that people are making decisions without knowledge or consideration for facts?

        Also, I love your appeal to primitive passions: ´The “enrichment” is an ironic term referring to the Islamic contribution to French society being “cultural enrichment” according to SJW. The people who indulge in driving trucks over children are referred to in some circles as “culture enrichers”.´ Avoiding the issue of terrorism and Islam and going to the “enrichment” part, you do realise that it is entirely due to France´s pre EU policies, yes? The same as the UK? The context is missing in your narrative.

      • The children deserved to die at Nice, or be raped at Rotherham?? Who is missing the context? You expect nothing to happen? Objection to this BS is “primitive”????? Rejection of facts? Whose doing the rejecting?
        Here is the Rotherham report, written by an expert.
        It was allowed to go on for much longer than it should because
        ” Several staff described their nervousness about identifying the ethnic origins of perpetrators for fear of being thought racist; others remembered clear direction from their managers not to do so.” (The executive summary)
        By not dealing with the real issue real damage is done, in this case to 1400 children, mostly Kaffir girls, on an industrial scale.

        This is not because of UK foreign policy, it is because 50 YO Pakistani Muslim men wanted to penetrate 12 year old British girls. That is a fact. That there were 1400 victims is the opinion of an expert. It is not “primitive”, it is an objective disgrace and it is still happening.

        I just offer this as an example.

      • “The children deserved to die at Nice, or be raped at Rotherham??” Hyperbole aimed at neutering conversation by shocking the other side and forcing them to apologize for something they didn´t say. Not a good start Fitz.

        “Who is missing the context? You expect nothing to happen? Objection to this BS is “primitive”????? Rejection of facts? Whose doing the rejecting?”: You are actually. You are trying to link two things (EU and Islam) you don´t like, even though there is no connection other than in your imagination. Let me explain. The Rotherham case, as shocking as it was, was not prepetrated by Syrians who arrived last year, but by British-Pakistanís who had been in the UK for years or decades (the uncle arrived in the 70´s). None came as some sort of forced refugee resettlement. Trying to link this to the EU just shows that you have nothing else but shock-and-hope in your cards. Also let me state that, as the atheist that I am, I don´t hold any religion in high regard when it comes to child abuse.

        “Here is the Rotherham report, written by an expert.
        It was allowed to go on for much longer than it should because
        ” Several staff described their nervousness about identifying the ethnic origins of perpetrators for fear of being thought racist; others remembered clear direction from their managers not to do so.” (The executive summary)”

        I see. So now political correctness is the fault of the EU. Funny because the most PC countries I know are all anglophone (and non EU). In any case, the failure of the UK police to act is the fault of the UK´s institutions. You have to explain how this will change unless you are advocating for mass deportations or selective human rights.

        The fact remains that the UK´s Pakistani community entered the country as part of the UK´s Commonwealth-biased immigration policy, so your connection to the EU is lacking. The blame lies way in the past (if you can really blame people for not spotting criminals decades into the future). That is the context.

      • It is the importation of the rape culture and terrorism that is facilitated by open borders is of course one of the main issues in this election.
        This is especially relevant in France where 7 of the Paris attackers came through Syria.
        137 dead.
        The example was given as to the damage that is caused when there is no action taken to fix the problems.
        This is the case in France where a person previously convicted of a Terrorist offence, a french citizen formerly of Morroco killed the police chief and his police officer wife in their home in the presence of their 3 y old having already been convicted of another terrorist offence.
        Relations deteriorated to the extent that at the memorial service the police would not shake the hand of the President or Prime minister.
        The Nice attacker was Tunisian.
        84 dead.
        You cannot complain when those supporting Le Pen say “this is our home”. 221 people who may still be alive but for the open borders policy. Something must be done or it will happen again and again, just like Rotherham.
        Le Pen wants out of the EU so that there are borders again.

        I take it Jason you are in favour of open borders

    • Fitz, conflating issues is a problem that will not solve anything. To be clear: do we have an issue with extremism of islamic origin, yes. Is Le Pen going to solve it, no, and neither is Brexit not Trump, because they do not want to target the root of the problem and instead appeal to simple solutions (build a wall, close our border, make (insert country) great again). In regards to your examples:
      Larossi Abballa: born in France
      “This is especially relevant in France where 7 of the Paris attackers came through Syria.”: they were all French or Belgian born!
      But of course you cite this little gem forgetting to add that the news was “…Hungarian security officials did tell a British newspaper that the majority of the attackers posed as refugees in order to return from Syria after training in the country.”
      Nice: “His parents are divorced.[8] His father, who lives in the family’s native town, told an international news agency that Lahouaiej-Bouhlel suffered from depression, drank alcohol and was a drug user: “From 2002 to 2004, he had problems that caused a nervous breakdown. He would become angry and he shouted … he would break anything he saw in front of him.” Well done Fitz, finally one that is actually foreign born. The problem is that this one case doesn´t support your assertion nor the nativist solutions you support unless “closing the borders” is code for something else. Please explain what you mean by “open” and “closed” borders and ho you see this as significant in situations were the majority of the attackers are local-born

      • Man is the only animal that trips twice over the same stone (or multiple times when biased).

      • I told you before that domicile was irrelevant, but without borders one cannot control who comes into the country, or the we peons from the Balkans. As for your stones, it is lucky you’re not biased.

        Ps I just noted that the police support le pen because of her stance on terrorism. You can google it.

      • Which border. Define it and how that will fix the problem. I have asked you repeatedly. Immigration from outside the EU is an individual country´s responsability and it is obvious that, for the UK at least, it was up for purchase. That won´t change because that is how the UK rolls. Ditto with France. Blaming others for lax policing and laughable immigration policies is not a solution. If the UK doesn´t want immigration from outside the EU they could have fixed that decades ago. Nobody has stopped them from doing so, but like little children they blame “the others” in Brussels when problems arise.

      • More lax policing on the Champs Elysees with an AK 47 on a driveby. Lots of priors for attacking police. he should have been in prison. All the Schengen borders should be closed. The UK is not part of Schengen so this is not relevant. Perhaps you can ask how all those weapons came to be in the mosques, and why no effort should be made to stop them entering the country.