One thing we haven't heard often in the past year was “the polls were right” but that was exactly what unfolded on Sunday in France as Macron and Le Pen won the first round of the election. The euro opened nearly 200 pips higher at the open with yen tumbling. CFTC positioning data showed few GBP shorts getting cleared out despite last week's jump. The Premium EURAUD long was closed for 240-pip gain, EURUSD long remains 205 pips in the green and EURJPY was stopped out at 190-pip loss.
The final tally isn't yet in but Macron and Le Pen will be in the final round of the Presidential election on May 7. The final results show Macron at 23.8% and Le Pen at 21.6% as of 0:56 am France Time at 95.6% participation. As the earliest numbers rolled in, Fillion conceded and threw his support behind Macron. There had been a slight chance he would stay mum or support Le Pen. Other candidates also endorsed Macron for the final round.
This result was as much a win for pollsters as for Macron. Despite many surveys showing him and Le Pen ahead, the market was cautious after Brexit and Trump. The same pollsters show Macron with a 20-point lead in the final round.
We warned last week that fears in the market were overstating a black swan scenario and the jump in the euro at the open underscored that. It climbed to as high as 1.0937 – a jump of more than 200 pips. EUR/JPY climbed nearly 400 pips.
Expect to see profit taking in fairly short order. Those moves are too big and the same types of fears may start to infect the second round. We will be watching the European open very closely for another surge of volatility. Also note that a finish above 1.0864 would be the best since November.
Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -22K vs -19K prior JPY -30K vs -35K prior GBP -99K vs -106K prior CHF -14K vs -10K prior AUD +43K vs +45K prior CAD -33K vs -32K prior NZD -15K vs -15K prior
The squeeze after Theresa May called the election certainly caught a few people on the wrong side but it wasn't a full-scale rush to the exits.
First there was Brexit, then Trump and now it's the French election; or at least that's the narrative playing out in the markets. We take a closer look. The Premium Insights closed the EURCAD long at 1.4495 for a 235-pip gain in order to make a way for a tactical dual EUR trade on Friday ahead of Sunday's French elections.
Polls showed fractional momentum for Macron, helping to boost the CAC-40 in countdown mode to the Sunday's 1st round vote. That uptick may be telling because a large number of voters said they were undecided earlier in the month.
A poll from Harris showed Macron at 24.5%, Le Pen at 21%, Fillon at 20% and Melenchon at 19%. Given the margin of error and other factors like turnout and undecideds, it's conceivable the second round could be the far right candidate Le Pen and the far left candidate Melenchon. Polls show Melenchon would win that contest but German Fin Min Schaeuble called it a 'nightmare scenario' because both are euroskeptics.
What's important to remember is that's a highly unlikely scenario and the only result that could immediately upend the euro. If Macron finishes in the top-two and moves to the runoff, he's heavily favoured against any of the candidates. Fillon would also be a big favorite against Le Pen or Melenchon.
So while the market sees this as a potential redux of Brexit or Trump, it would take a far bigger swing. Brexit polls were close in the days ahead of the vote and Trump lost the popular vote but won the electoral college. In France, it's a national popular vote so polling is simplified.
That said, there is always the risk that voters are playing coy with pollsters again or could swing late. The risks may be even higher after what looked like a terrorist attack on the Champs Elysee late Thursday. That alone could add to jitters Friday.
After talking with many traders and analysts, there is a distinct fear of history repeating itself but those fears (and market pricing) overstate the odds of a major surprise.
Sunday Afternoon VolatilityWatch for exit polls hitting at 8 pm Paris time on Sunday (7 pm London, 2 pm New York), coinciding with the market open in the Pacific.
Before that, we'll watch for continue comments from leaders at IMF meetings in Washington and the Japan Nikkei PMI at 0030 GMT. The prior was 52.4.
|Flash PMI Manufacturing|
|52.4||Apr 21 0:30|
|Eurozone Flash PMI Manufacturing|
|56.2||Apr 21 8:00|
|France Flash PMI Manufacturing|
|53.3||Apr 21 7:00|
|Germany Flash PMI Manufacturing|
|58.3||Apr 21 7:30|
A drop in oil prices and reports that Canadian officials will try to tame the housing market sent USD/CAD close to 1.35 on Wednesday. The US dollar was the top performer while the Australian dollar lagged. New Zealand CPI and Japanese trade balance are up next. The Premium short in the DOW30 was closed for 205-pt gain, leaving another index trade open. There are 2 CAD trades in progress.
The Canadian dollar has been a challenge for traders this year. A series of headfakes, central bank mixed signals and false breakouts have kept the pair confined in a rough 1.30 to 1.35 range. Economic data has been extremely strong lately but the BOC has warned it's a mirage.
Meanwhile, two other factors threaten to break the range: Oil and housing.
Crude fell nearly $2 on Wednesday after the US reported an unexpected build in gasoline supplies, low demand and another rise in production. That final factor will irk OPEC and could scuttle a quota extension at the May 25 meeting.
If that's the case, crude and the Canadian dollar would swan dive in synch. The assumption is that Saudis will suck it up until after the Aramco IPO but that's a dangerous bet.
For the loonie, the wild card is housing. Tomorrow Ontario provincial government – where Toronto is located – will reportedly unveil 10 measures aimed at cooling the housing market. Leaks sound like they could be drastic as they include rent controls, taxes on foreign buyers, levies on speculators and more. Prices around Toronto have risen more than 30% in the past year and have tripled since 2000 so a correction is long overdue but heavy-handed government intervention could turn it into a rout.
The consumer has long been a major driver of Canadian economic strength but if housing wealth evaporates, so will spending (and CAD).
Technically, 1.3500 offered some tough resistance Wednesday even as oil prices were plunging. Beyond that, the March high of 1.3536 and the late-December, no liquidity high of 1.3599 are resistance. Also note that CAD/JPY is at the lowest since November and GBP/CAD is at the highest since September.
The loonie isn't the only commodity currency that's wilting; AUD and NZD are also nearing the lows of the year. A big factor in whether the kiwi gets there will be the Q1 CPI report due at 2245 GMT. The consensus is for a 0.8% q/q rise. That would be a healthy inflation boost and get prices up to 2.0% y/y.
At 2350 GMT, we'll be watching Japanese trade balance. The consensus is for a 608B yen surplus but more important will be trade growth. Exports are forecast to rise 6.2% and imports up 10.0%.
|0.4%||Apr 19 22:45|
|0.68T||Apr 19 23:50|
Care to guess this chart? It's the monthly chart of a popular US sector index. As you can see, it failed to break its 7-year channel right at the same level of the 76.4% retracement of the decline from the 2007 high to the 2009 low. The relative strength index may also indicate further declines towards the mid-point of the channel's height, a break of which may drag it to pre-November levels. i.e. erasing the all of the gains from the Trump's victory rally. Again, this is not FX, commodity, bonds or a ratio. Just a straightforward index. It's a big deal when you find out what is.