How to trade the French election in the weeks ahead? – Nomura

Nomura Global Markets Research team, in the FX Insights report, takes note of the various scenarios that could unfold ahead of and post French elections in the EUR pairs and French OAT’s (Obligations Assimilables du Trésor) which are longer term bonds.

How to trade the first round (April 23)?

Exit polls schedule - Exit polls will be released at 7pm (BST), just one hour before the Sydney FX market opens on Sunday 24 April (local time), with the result known with a high level of confidence by 9pm to 11pm.

The report says, “If Marine Le Pen’s support is higher than 30% we expect financial markets to be more concerned ahead of the second round. The market currently expects Emmanuel Macron and Ms Le Pen to make the final runoff, but polls may shift considerably in the final two weeks. So there is a chance of a scenario, where one of the two favourites does not make it into the final runoff. This could be the déjà vu moment, as it would be a rerun of 2002. After the first round, endorsements for the two candidates from the remaining candidates may be market moving if they are for Ms Le Pen.”

How to trade the second round (May 7)?

Exit polls schedule -  The second round follows a similar timeline to that of the first round with release times.

“If Ms Le Pen wins we would expect EUR/USD to test parity, potentially falling to 0.97 and 10yr OATs to sell off by 30bp. Our base case is that Mr Macron wins, both EUR and OATs rally, but the difference is that we would expect the EUR rally to continue by year-end to 1.15, but we would eventually fade the rally in OATs as tighter policy from the ECB is on the way.”

Note - Hedging flows are likely to weigh on EUR and push election-dated vols higher before a selloff in the days prior.

Nomura expects a Macron victory and expect EUR to have a relief rally

"EUR would trade materially higher beyond the knee-jerk reaction after the event risk with the ECB moving towards tighter policy over the year, so we target EUR/USD at 1.15 by year-end. On the rates side, on a Macron win the overarching theme in markets will likely be an ECB normalisation. We continue to hold tighter 2yr schatz swap spreads and Eonia curve steepeners. We maintain a short bias on 30yr OATs vs. 30yr Bunds and SPGBs."