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Euro hits 6-month high against dollar on Macron win

Emmanuel Macron’s triumph in the French presidential election nudged the euro to a six-month high against the dollar, with analysts and investors predicting that the result could spur a return of money to the eurozone.

The euro inched up 0.1 per cent to $1.1021 in the hours after it became clear the centrist had beaten Marine Le Pen, before dipping 0.1 per cent to $1.0977 as Asian trading started. But most of the impact from the election’s outcome had already been priced in, with the single currency up 3.5 per cent against the dollar over the past 30 days.

However, investor relief was evident from a slide in Japan’s yen, which weakened 0.2 per cent against the dollar to ¥112.88. It had briefly softened past the ¥113 mark at the open, touching its weakest level since March 17. The Australian dollar was weaker, softening 0.1 per cent to $0.7415. 

While Mr Macron’s victory was widely expected by investors, it has eased some lingering concerns over the advance of populist politics sparked by the UK’s Brexit vote and Donald Trump’s win last November. 

“Moving past this hurdle will encourage inflows into European risk assets,” said Erin Browne, head of macro investments at UBS O’Connor, a hedge fund. “The European economic and profits recovery cycle is at a much earlier stage than in the US, and offers better valuation and upside potential. I expect to see further appreciation in European stocks and peripheral spread narrowing relative to Bund yields.”

Mr Macron’s victory in the first round of the French election in late April lifted investor appetite for European equities, with funds targeting the region notching up their sixth straight week of inflows in the seven days to last Wednesday, the longest positive streak since late 2015. European bond funds pulled in $1.4bn last week, the most since early January. 

The centrist candidate’s victory gives markets “a much deserved breather from European politics”, said Bill Street, head of European investments at State Street Global Advisors, who argued that “Macron only offers upside surprises”.

“In a do-nothing scenario, we have the status quo of political paralysis, but with a favourable external environment and steady growth improvement,” he argued in a note. “In the goldilocks scenario, Macron gets a working parliament and builds a partnership with Germany to launch meaningful reforms. That would deliver a substantial boost to markets by year-end, which is currently not priced in.”

Some analysts were more circumspect, however, noting that despite the gap between Mr Macron and Ms Le Pen the voting turnout was subdued and a record number of voters cast blank ballots. France also faces parliamentary elections in June, and it is uncertain whether the new president can cobble together a governing majority. 

“Today’s strong result for President-elect Macron is a major milestone on the road to a reformed France, but the important step of parliamentary elections still lies ahead,” Barclays noted.

While polls show that Mr Macron’s En Marche! party could see 249-286 members of parliament — close to an absolute majority — the UK bank’s French analysts Francois Cabau and Philippe Gudin were sceptical.

“We take these estimates with a healthy pinch of salt given the unprecedented split of the political landscape and our belief that these elections tend to respond to dynamics at the local level and programme party line,” they wrote in a report to clients.

Many investors and analysts also remain far more concerned about the looming Italian election, due to be held by March next year. The populist Five Star Movement has long been at or near the top of opinion polls. 

“The days when voters stuck with their traditional centre-right and centre-left parties in Europe are gone and that is unlikely to be reversed any time soon,” said Megan Greene, chief economist at Manulife Asset Management.

“Nowhere will this be more obvious than in the upcoming Italian elections, which could range from being moderately bad (a hung parliament) or very bad (euro exit) for the Italian economy, with implications for Italian and European asset classes.”

Via FT