This week, the euro touched its lowest level in six weeks, with the U.S.-German 10-year yield spread widening more than 200 basis points, its highest gap in 17.5 years.
Part of this selloff of euros is prompted by the market starting to eye the political uncertainty surrounding the upcoming French elections, as reflected in the German-French 2–year yield spread also widening to its highest level in four years.
The key risk is that a victory by far-right candidate Marine Le Pen, of the National Front party, could bring systemic risk and possibly huge implications for the global financial system. Le Pen is calling for the breakup of the eurozone and the re-introduction of the French franc.
While polls do not show that Le Pen is even close to victory in May's run-off election, she does seem to be narrowing the gap with the other candidates and the market is not ignoring that fact.
The French elections will be held on two key Sundays:
April 23: A preliminary round of voting which includes a host of candidates
May 7: A final vote with a runoff between the two leading candidates
Currently, polls show the most popular candidate to be Emmanuel Macron, an independent who favors the EU, open borders, global trade and technical innovation – the complete opposite of Le Pen's platform. Macron emerged out of nowhere only after the demise of the previous popular candidate Francois Fillon, who was in the center-right politically. His campaign collapsed when it became clear that he had paid his wife for years to be his assistant, though she didn't do any work.
With democracy voicing loud and clear results in Britain, America, Poland and other countries recently, the market is not ignoring the sense of brewing anti-establishment rage.
Unlike the U.S., France's wage discrepancy between the rich and the poor has actually been marginally shrinking and in absolute terms is even less than China's. So rather than focusing on wages or tax cuts, the key to the rise of a far-right candidate such as Le Pen will be immigration issues and national security.
My View: A Le Pen victory is still extremely far-fetched. However, all it takes is one terrorist attack prior to the election and public sentiment could be easily swayed. Given such potentially high political risk, the euro may have limited upside potential and consequently may even drift lower in the coming weeks.
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