Danish multi-asset brokerage Saxo Bank has issued a note to clients, preparing them for volatility and uncertainty across the euro crosses and European indices. As France heads to the polls on the 23rd of April, the FX market is likely to be abnormally volatile in the aftermath of the results.
The first round of the French election is on a Sunday, an already different scenario from the Brexit referendum and the US election. While the two most volatile events for the financial markets last year were occurring as the FX market was open, the first results from the French election polls will most likely be released on Sunday evening.
During the New Zealand session, FX markets liquidity is very thin and extreme moves are very likely when a substantial catalyst like the French presidential election is present. French nationalist party candidate Marine Le Pen and Jean Luc Melanchon, backed by the French communist party are the outcomes which are worrying the market the most.
Thin liquidity is likely to exacerbate any moves across the FX and European indices markets.
Saxo Bank’s Measures
Depending on market conditions, Saxo Bank has informed its clients that it will take measures to ensure that the positions of its clients are adequately capitalized. Traders will prospectively face up to 4 percent margin requirements (leverage of 1:25) on all euro positions and European indices.
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The second round of the French election is on the 7th of May, which falls on a Sunday. Just like the Presidential election in the US, the French election is likely to cause a stir of volatility. Saxo Bank shared with clients that the FX options market is pricing in a 7 percent drop in the value of the euro should Le Pen win the vote.
European induces are closed overnight and material gaps around both rounds of the French election are very likely. The 4 percent margin requirement is only an indicative level of margin change, and Saxo Bank is urging clients to “trade responsibly with an appropriate amount of leverage and an adequate level of collateral”.
The final measures on margin requirements which Saxo Bank takes will be communicated on Thursday, the 27th of April 2017 and will take effect on Wednesday the 3rd of May 2017 at 13:00 GMT.
FX Volatility on the Rise Across the Board
Brokers could also take measures around the first round of the election on the 23rd of April due to the increased risk of market gaps, should Le Pen and Melanchon take charge in the first round.
For the time being the consensus amongst polsters is for a run off between Marine Le Pen and centrist candidate Emmanuel Macron.
In the meantime, some brokers have announced that they will increase margin requirements on the Turkish lira in the run-up to the constitutional referendum on presidential powers this weekend. Overall FX volatility increased materially since last night, as US President Donald Trump jawboned the US dollar.