French election: Pollsters did a far better job of predicting the outcome - SocGen

 Kit Juckes, global strategist at Societe Generale, notes that the main takeaway from the first round result of the French election is that pollsters did a far better job of predicting the outcome in France than they did for the EU referendum in the UK or the US Presidential election.

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There is a huge amount to be said in the weeks and months to come about the historic failure of the two establishment parties in France to make it through to the second round of the Presidential election, and indeed about what that means for upcoming Parliamentary elections too, but for now, the biggest takeaway from the first round result (and while the final count isn’t know yet, it results in a vote-off between Emmanuel Macron and Marine Le Pen) is that pollsters did a far better job of predicting the outcome in France than they did for the EU referendum in the UK or the US Presidential election.

And it’ s worth noting that the first poll released after the first round vote ended, from iPsos, sees a 62-38 outcome in favour of M Macron in the second round. That’s what the FX market is going to trade off in the days ahead and indeed is already doing. The Euro is on its way (up) and risk assets and currencies are heaving a sigh of relief.

The low in EUR/USD came when real yields were down at -120bp in Germany, and +50bp in the US. That gap narrowed to 105bp by the end of last week. It of it is to tighten dramatically further, the heavy lifting will have to be done by rising Bund yields.

10year CBRIs and the IFO index suggests a re-coupling of the two lines after recent divergence could add over 50bp to German real yields. Now, that’s just a visual impression but a 50bp narrowing in the US/German real yield differential would suggest EUR/USD ‘ought’ to be at 1.14, and if we got a move higher in US yields and a further boost to EUR/JPY, that would suggest the 2 ½% EUR/JPY move we’ve seen so far is by no means the end of it.