On Bets France Is Done Deal, Euro Goes From Dicey To Darling

The euro is suddenly everyone’s favorite even as it was perceived as the riskiest currency on the planet until Sunday’s French election. This shows what a difference a week can make.

After the first round of the vote delivered all that investors hoped for, Goldman Sachs Group Inc. expects the euro to gain almost 4 percent. Nomura Holdings Inc. has recommended buying it while Pacific Investment Management Co. has a “more constructive” view on the currency. While BlueBay Asset Management has already added to holdings, BlackRock Inc. and JPMorgan Asset Management favor European shares amid reduced political risk.

The odds of a political upset similar to Brexit and Donald Trump’s victory were reduced and as risks of a victory for anti-euro presidential candidate Marine Le Pen receded, investors are more bullish on European assets. Centrist Emmanuel Macron is seen becoming president by French polls, which got the first-round results right. Option prices before the April 23 vote, which were the most bearish for the euro than any other currency, is in sharp contrast to the rising optimism.

“We see short-term political risk in Europe receding,” Thomas Kressin, Munich-based portfolio manager at Pimco, which manages $1.5 trillion of assets, said in an interview. “We consider the euro to be cheap. Investors will be back to look at the euro from a valuation basis. We see the fundamental fair value of the currency closer to $1.25 in the long term.” Pimco declined to comment on its positions.

Touching a five-month high of $1.0951 on Wednesday, the euro rallied 1.6 percent after the French presidential election as of 10:00 a.m. in London on Thursday. In the same period, the Stoxx Europe 600 Index of shares has gained 2.4 percent. And narrowing down to 47 basis points from as high as 84 basis points in February was the yield spread between French 10-year securities and German bunds.

“The French election is already a first step toward a more stable political environment in Europe,” said Vincent Juvyns, global market strategist at JPMorgan Asset, which oversees $1.8 trillion globally. “I am, from a fundamental and economic perspective, enthusiastic about Europe.” The fund is neutral at the moment on Europe but would look to increase exposure in coming weeks, he added.

The shared currency is expected to extend its advance toward $1.13 by Goldman Sachs and UBS Group AG both.

“The market has acknowledged that the polls were accurate in France,” Isabelle Vic-Philippe, Paris-based fund manager at Amundi Asset Management, said in emailed comments. “So the second round seems to be a done deal and Macron has a high probability of becoming the next French president.”

However, some caution is still warranted.

“The probability of a Le Pen presidency has decreased but is not yet null,” said Marc de-Muizon, a London-based economist at Deutsche Bank AG. “The risks of a possible new scandal, a strong debate performance by the National Front leader or complacency from the electorate should still be monitored.”

Goldman strategist Silvia Ardagna wrote in a client note that another political risk looms on the horizon just as France concerns ease. “The next pressure point” will be the Italian elections, likely in early 2018, Ardagna wrote.

(Adapted from Bloomberg)

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Categories: Economy & Finance, Geopolitics, Uncategorized

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