Euro Holds Gains as French Presidential Vote Sparks Relief Rally

(Bloomberg) -- The euro was steady, maintaining gains of about 1.2 percent after the French presidential vote led to a run-off between centrist Emmanuel Macron and National Front candidate Marine Le Pen, sparking a relief rally across global markets.

The rally boosted the euro and emerging market currencies while weighing on haven assets such as the Japanese yen and U.S. Treasuries. The relief was fed in part by the vote knocking out more radical candidates such as leftist Jean-Luc Melenchon. At the same time, the results were close to opinion surveys conducted before Sunday’s vote, validating the polling process and providing some comfort to investors ahead of the final vote on May 7.

• Euro gains were strongest as the Asian trading session got underway; sparse liquidity and a raft of stop-loss euro buying kicked the shared currency to its highest level since Nov. 10 vs the dollar and to its largest gain vs the yen since April 2013. Trading was brisk in the Asian session and at the start of European trading, before slowing considerably, said traders from London to Toronto and New York who are familiar with the transactions and asked not to be identified because they are not authorized to speak publicly
• With the euro grabbing the spotlight for now, the dollar remained defensive while halving its loss for the day as markets await details of tax reform this week
• Focus may stay on the euro ahead of Thursday’s regularly scheduled European Central Bank meeting. Though the ECB is not expected to shift policies as a consequence of the election outcome, traders will parse remarks from President Mario Draghi for any shift in tone
• Over the weekend, Draghi reiterated that underlying inflation in the euro area remains subdued; “we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he said in a statement to the International Monetary and Financial Committee in Washington. A reiteration of those remarks Thursday may take some of the steam out of the euro, the London trader said
• Still, if investors lower the chance of a Le Pen presidency or the breakup of the euro area to close to zero, this could push the EUR higher vs USD and JPY, and EUR/USD near 1.13, according to a note from Goldman Sachs
• EUR/USD is trading at ~1.0852 after rising as high as 1.0937 in Asian trading. The pair may be capped by offers that are now positioned from 1.0935 to 1.0950, traders said. Macro-driven funds and leveraged accounts were euro buyers, adding to longs, while real-money players took a step back to await calmer conditions, traders said
• USD/JPY pared gains to a low of 109.71. The pair earlier rose as high at 110.64 amid stop-loss-driven selling of JPY as haven trades were unwound and as EUR/JPY provided lift as it rose as much as 3.4% to 120.91. USD offers are positioned above 110.65 while some bids were filled under 109.80, traders said

To contact the reporters on this story: Dennis Pettit in New York at dpettit5@bloomberg.net, Alexandria Arnold in Seattle at abaca3@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Greg Chang, Elizabeth Stanton