French election why Francois Fillon could be the euro s secret weapon

As we head into the second French Presidential debate tonight at 1940 BST/ 2040 CET, all eyes will be on Emmanuel Macron, who is the favourite to win the election.

This debate is key as some candidates have said that they won’t attend the final debate on April 20^th, as it is too close to the election. So, the performance in tonight’s debate could ultimately shape who gets the keys to the Elysee Palace, and how the euro trades in the coming weeks and months.

Can the debate change the outcome of the election?

It is worth remembering that the French Presidential election has two rounds, the first round on 23^rd April and the second round on 7^th May. Right now the odds suggest that Macron (centrist independent) and Le Pen (leader of the Far Right anti-euro Front National) are favourites to make it into the second round, with Macron’s chances of winning the overall election at 63%, versus 25% for Marine Le Pen. The question now is, will this debate change the probability of who will eventually win the Presidential election and could this impact the performance of the euro and European stocks?

Why Fillon is still in the game

It is worth digging a bit deeper into the data to figure out whether the French election could throw a Brexit or Trump-style grenade into the financial markets. Although Macron and Le Pen are expected to win the second round, a third of the electorate also told the pollsters that they could still change their vote. Added to this, Macron’s supporters tend to waver the most.

This is why it is premature to rule out a place in the second round for Francois Fillon, the centre-right candidate who was considered washed up after a controversy around him paying his family for “fake jobs”. If this election is as wide open as the polls suggest, then Fillon, with his solid block of conservative voters, could still be in the game.

Le Pen’s chances of winning look stretched

We expect Fillon to give his all in tonight’s debate, and he is likely to come out fighting as this is his last chance to use a public debate to boost his popularity. This might give him a slight advantage above the supposedly safer candidates Macron and Le Pen.

If Fillon can perform well during this evening’s debate, then the market could re-price for a Fillon/ Macron second round, with Le Pen out of the picture. Oddschecker, the betting odds comparison site, has a 33% chance of a Macron/ Le Pen second round run-off, a 28% chance of Fillon/ Le Pen, and a 20% chance of Fillon/ Macron. However, as Leighton Vaughan Williams, the odds expert, has pointed out, the polls and bookmakers may have got it wrong. He mentioned the specific problems with the French election system including: the volatility of the French election system, the French imperviousness to scandal, the unusual youth of Macron that could be off-putting for some voters, and the historical vulnerability of independent candidates. Thus at this stage of the election cycle, Fillon could be worth a second-look, and Le Pen’s chance of winning might be a bit rich.

Where is the French money going?

The other interesting thing that Oddschecker has noted, is that although Macron is the solid favourite amongst all of the bookmakers that they track, there is a lot of divergence between bookmakers on the implicit chances of Fillon and Le Pen winning. For example, the French bookmakers have seen French traders betting on Fillon winning rather than Le Pen, whereas the UK bookmakers’ and US see Le Pen beating Fillon. If you think that French traders, who are closer to the election, are a trustworthy source, then maybe the market is too optimistic on Le Pen’s chances?

The impact on the euro:

If tonight’s debate sees Fillon perform well then the FX market could start to price out the chance of a Le Pen victory in the first round, which we believe is one of the reasons why the euro has been under pressure and the French-German yield spread has widened again in the last week or so.  A strong Fillon performance could see the euro rally in anticipation of a Macron/ Fillon second round, which could see EUR/USD move back towards the 200-day sma at 1.0867. We would also note that EUR/USD is approaching key support – the 100-day sma at 1.0624 –  and that could also limit further downside.  A reduction in the French-German yield spread could also help to further extend gains in the Cac 40, potentially back towards the 5,300 highs from 2015.

Overall, there is a chance that the market has been wrong-footed by the polls, and Le Pen is not guaranteed a spot in the second round. If we are correct, then the political premium that has weighed on the euro in recent months could evaporate, allowing the single currency to stage a decent rally as we move into the second quarter.