EMU under scrutiny, next year’s French Presidential election risks - Rabobank

Noting that the sell-off in the EUR after the ‘no’ vote in the weekend’s Italian referendum proved to be extremely short-lived,analysts at Rabobank explained that potentially a bigger risk for EMU coherence is next year’s French Presidential election. 

Key Quotes:

"Polls have been indicating that the populist Far Right leader Le Pen would lose in the second round of the election to the winner of the Republican Party primary. Surprising this has been won by the reformist Fillon whose Thatcherite policies include significant labour market reforms. Although this outcome would be popular with the financial markets, it would mark a significant change for France. Although an opinion poll published today by Ifop-Fiducial suggests that Fillon would win 65% of the vote in the second round, many market participants are likely to retain a healthy scepticism of poll given their misleading implications for recent elections both in the UK and in the US.

As the April/May French elections approach, it is likely that the EUR will adopt a fairly binary relationship with French political news. Indications that Fillon will win are likely to be supportive while a boost to Le Pen’s support are likely to see the EUR softening in view of her calls for a referendum on France’s membership of EMU. The EUR could see some benefit from the Dutch elections on March 15. Although polls are indicating that the current governing coalition is unlikely to return to power, a Eurosceptic coalition seems unlikely and thus the outlook for EMU coherence could be given a boost. While the German elections later in the year could bring increased support to the Far Right, a more liberal governance is currently expected to prevail. This view, however, may be at risk if tensions over the migrant crisis surge again."

EUR/USD at 1.10 on a 12 mth view - Rabobank