First there were “Grexit” fears, then the “Brexit” shock and now investors have started to brace for “Frexit”.
The latest of the exit scenarios to spook financial markets, the risk of France leaving the eurozone has heightened in recent days after far-right candidate Marine Le Pen last weekend launched her presidential campaign with a hardline speech on immigration and globalization.
Her bid to become the next French president has for long been discounted, but as a scandal has surrounded the campaign of conservative candidate François Fillon, Le Pen is seen as a serious contender for the position.
“The French presidential candidate, Le Pen, has managed to create a stir since putting herself forward and vocalizing her desire for a Frexit,” said Fiona Cincotta, market analyst City Index, in a note.
“The current thinking is that a first round win for Le Pen is a very real possibility, however, political analysts believe a second-round win for her would be an enormous challenge,” she added.
In the French election system, a candidate needs to win a majority in the first-election round — set for April 23 — to secure the presidency. Le Pen is currently leading the polls for the first round, but is poised to fall short of winning an outright majority. That would put her against the second-most popular candidate in a runoff election to be held on May 7.
While Le Pen
is forecast to come out on top in the first round, expectations still
hold that centrists will flock to her second-round opponent, possibly
former economy minister and center-left candidate Emmanuel Macron.
According to the recent polls, Macron is likely to beat Le Pen by 65% to
35% in the second round.
“Yet this sounds very familiar and parallels can easily be drawn with Trump and even Brexit, which is why the markets are starting to look towards safe havens and simultaneously sell out of the euro,” Cincotta said.
These trades “will amplify as we move closer to election date should Le Pen look to be increasing in popularity,” she added.
A survey by polling firm Ipsos Mori recently found that support for a “strong leader who will break the rules” is particularly high in France, where 80% of respondents have expressed that view.
The financial markets have started to react to the political risks in France. The spread between French TMBMKFR-10Y, +0.00% and German bond TMBMKDE-10Y, +0.00% yields earlier this week widened to the highest since September 2012, according to FactSet data, indicating traders are getting more concerned about France’s economic outlook.
The euro EURUSD, +0.9171% has also pulled back and is trading around its lowest level since late January.
“We expect the euro/U.S. dollar exchange rate to reach the low for the year sometime in the next three months, during the French political election campaign, at a level close to parity,” said Kit Juckes, global head of FX strategy at Société Générale, according to the Guardian.
“If Marine Le Pen doesn’t win the election, we expect a very significant euro rebound through the second half of 2017 as valuations and capital flows dominate,” he said.
Le Pen is tapping into the anti-establishment sentiment sweeping across Europe and the U.S. In a speech on Sunday to launch her presidential bid, the National Front leader pledged to “give France its freedom back,” echoing the same nationalist agenda seen on Donald Trump’s election trail and in the U.K.’s Brexit campaign.
France’s Marine Le Pen reiterated the National Front’s commitment to pull France out of the European Union, NATO, and to restore the franc as the country's official currency, as she launched her presidential campaign over the weekend. Mark Kelly reports. Image: AP
She also promised to hold a referendum on France’s EU membership, as she has called for France to leave the euro and dramatically reduce immigration. Le Pen is expected to capitalize on the scandal engulfing former election favorite Fillon following a criminal investigation into whether his wife received a state salary without performing any work.
On Monday, Fillon defended the payments to his wife and said he’ll stay in the race to become France’s next president.
“The French election campaign has already thrown up a number of surprises. We thus need to watch it closely for the tail risk that ultra-right Le Pen could win the presidential race this year,” said Holger Schmieding, chief economist at Berenberg, in a note.
“But on balance, the scandal engulfing the centre-right candidate Fillon has lifted the prospects of the centre-left reformer Macron more than those of Le Pen,” he added.