Euro Slides After French Elections

After hitting a high of 1.3640 last week, the lack of any meaningful economic data has led to more profit taking in the EUR/USD. The initial French elections have delivered the results that the market had been anticipating, which is an eventual runoff between Sarkozy and Royal. The two candidates are neck to neck with Sarkozy holding a tiny lead over Royal.

French voters can be notorious for changing voting habits between round one and round two, so either candidate still has the chance of becoming France’s next head of state. A win by Sarkozy would be short term bearish for the Euro, but long term bullish while a win by Royal would be the exact opposite. To read more about why this is the case, see our Special Election Report. Part of the Euro’s slide today can be attributed to the recovery in the dollar, but the other part is due to profit taking in EUR/JPY. The IFO survey of German business sentiment is due for release on Wednesday. Even though the ZEW survey reported stronger analyst sentiment, the recent strength of the Euro could prompt businesses to be less optimistic. Although some companies like Volkswagen have learned from their mistakes of under hedging foreign exchange risk in 2004, many companies did not. Paris-based L’Oreal recently reported that sales were up 7.9 percent in the first quarter, but the details of their earnings data indicate that the rapid rise of the Euro during the quarter actually produced a negative 4.1 percent impact on sales. We suspect that L’Oreal was not the only company to see their profit margins squeezed by currency fluctuations and the IFO report could reflect that.