(Bloomberg) --
A win for far-right candidate Marine Le Pen in France's election this month could drive the euro toward parity with the dollar, according to Nomura Holdings Inc. strategists.
It's a much closer electoral race than last time around in 2017 and she could oust President Emmanuel Macron, said strategists including Jordan Rochester, putting this at around a 20% probability. The euro would slump from current levels around $1.09 to $1.05 if she's victorious, and then drop further toward 2016 lows just above $1.03, they wrote in a note.
They even see an outside risk of the common currency sliding below parity against the dollar for the first time in two decades, if she were to win both the presidency and the legislature, which is decided by separate votes in June. ABN Amro Bank NV said last month its base case was parity given the Ukraine conflict and supply disruptions to Europe's economy.
“The Le Pen risk is real this time,” the Nomura strategists said. “It is unlikely to mean the end of the euro area and EU, but it would likely mark a significant step back into nationalist policies, much less chance of EU or euro area reforms and fewer EU joint issuance initiatives.”
Polls show incumbent Macron has a lead over main rival Le Pen, though it has narrowed sharply in recent weeks. That has pressured French bonds, stocks and the euro, down 1.4% this month. Options sentiment on the currency is at bearish levels similar to that seen before the 2017 vote, though traders are also hedging for risks including the Ukraine conflict.
Read more: Le Pen Risk Adds Another Layer of Euro Uncertainty: Trader Talk
Hedge funds have already added exposure to a further drop in the euro, targeting strikes at $1.08, according to traders. They are also using so-called reverse knock-out options at $1.05, suggesting they don't see a drop below this level as that would kill any payout.
For his part, Rochester is recommending a similar options trade that benefits if the euro trades below $1.07 but foregos further profits if it dips below $1.05. That cheapens the cost of betting on a drop.
“Even if Le Pen were to win the presidency, markets would not expect a big win in parliament for Le Pen's National Rally party,” the note said. That makes “the chances of her agenda being pushed forward unlikely, unless that assumption on the legislature is also tested.”
©2022 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
