French election fallout triggers relief rally for euro

EUR: Initial relief that RN majority can be avoided

The euro has strengthened modestly at the start of this week following the first round of the French elections over the weekend. It has resulted in EUR/USD rising to a high of 1.0776 and EUR/GBP back up to the 0.8500-level. The euro has staged an initial relief rally on the back of investor optimism that Le Pen’s RN Party is likely to fall short of winning a majority in parliament although it will not be confirmed until after the second round of the election on 7^th July. The results from the first round of the elections were broadly in line with opinion polls. The RN party are projected to win around 33% of the vote according to analysis from five polling companies late on Sunday. The left-wing New Popular Front coalition is expected  to win about 28% of the votes, and President Macron’s centrist alliance around 21%. The centre-right Republicans are expected to win around 10% of the vote. It was a strong showing from Le Pen’s RN Party who are on course to become the largest party in parliament. It had initially been hoped that public support from the RN Party would drop in the parliamentary elections in comparison to the EU elections held in early June.

The other parties including President Macron’s centrist alliance and left-wing New Popular Front coalition are now planning to prevent the RN Party from winning a majority in parliament in the second round of the elections. French Prime Minister Gabriel Attal stated “our objective is clear: to prevent the National Rally from having an absolute majority. A view shared by Jean-Luc Melenchon, the leader of the far left France Unbowed party who stated “nowhere we will allow the RN party to prevail” and would encourage third-placed candidates from the left-wing group to withdraw. In more than half of the 577 constituencies, three people qualified for runoffs. In those situations, the third place candidate can withdraw to boost the chances of another party defeating the RN party. President Macron’s Renaissance party has also said it would pull third-placed candidates where it would help those who respect “the values of the republic” beat the far-right although it is not clear whether Macron’s party will withdraw in races where the far-left would benefit. The deadline for filing for the second round is at 6pm on Tuesday. In light of the results so far from the first round of the elections, it leaves the two most likely outcomes as i) a hung parliament with no absolute majority and ii) a RN cohabitation government. The number of constituencies RN won and the fact that the left and centre are neck and neck in some constituencies does not make it an easy decision for which candidate to withdraw and both factors could still increase the risk of outcome two (RN cohabitation government) that would be more unfavourable for the euro.  We are not expecting today’s relief rally for the euro to be sustained for long ahead of the second round of the election.          

FRENCH FIRST ROUND ELECTION RESULTS

Source: Le Monde & Ipsos

CNY/JPY: More evidence of slowing cyclical momentum in China

The main economic data releases at the start of this week have been in Asia. The release of the latest PMI surveys from China have signalled a further loss of growth momentum in Q2. The composite PMI fell by 0.5 point to 50.5 in June which was the lowest reading since the end of last year. It was driven mainly by a loss of business confidence in the non-manufacturing sector where the PMI fell by 0.6 point tot 50.5 in June. While the manufacturing PMI remained stable at the weaker level of 49.5 in June. The loss of cyclical momentum for China’s economy in Q2 after the pick-up in growth in Q1 is reinforcing market expectations that the renminbi will continue to weaken. USD/CNY has been trending gradually higher since the middle of May and hit a year to date high last week of 7.2691 as it continues to move back closer to the highs from last autumn between 7.3000 and 7.3500. Chinese policymakers have been allowing the renminbi to weaken gradually against the US dollar by setting higher daily fixes for USD/CNY. The spread between USD/CNY and USD/CNH has also widening reflecting building expectations that the renminbi will be allowed to weaken further in the near-term.

Even though the renminbi has been allowed to weaken gradually against the US dollar, it has not prevented the renminbi from continuing to strengthen sharply against the yen. CNY/JPY has risen above the 22.00-level from around the 20.000-level at the start of this year. Since the COVID shock started in early 2020, the renminbi has strengthened by just over 40% against the yen. If the yen continues to weaken , it will further encourage Chinese policymakers to low the renminbi to weaken further against the US dollar as well. USD/JPY continues to trade close to year to date highs at around the 161.00-level at the start of this week. Yen weakness is keeping pressure on Japanese officials to intervene against to support the yen. The release of the latest US nonfarm payrolls report on Friday would have to deliver significant downside surprise to trigger a reversal of the yen’s recent weakening trend in the week ahead. The consensus expectation amongst US economists tracked by Bloomberg is already looking for nonfarm employment growth to slow to around 190k in June after averaging around 250k jobs gains per month so far this year.    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:55	German Manufacturing PMI	Jun	43.4	45.4	!!
EC	09:00	Manufacturing PMI	Jun	45.6	47.3	!!
GE	13:00	German CPI (YoY)	Jun	2.3%	2.4%	!!
GE	13:15	German Buba President Nagel Speaks	--	--	--	!!
US	15:00	Construction Spending (MoM)	May	0.3%	-0.1%	!!
US	15:00	ISM Manufacturing PMI	Jun	49.2	48.7	!!!
EC	20:00	ECB President Lagarde Speaks	--	--	--	!!

Source: Bloomberg