(Recasts, adds new quotes, background)
By Jemima Kelly and John Geddie
LONDON, April 11 Investors who worry that the
French election could see the far-right Marine Le Pen reach the
second round are bracing for another risk - that the far-left
Jean-Luc Melenchon could make it too, perhaps even against her.
With just 12 days to go until the first round of voting in
the presidential election, polls are tightening. For weeks
investors have been betting that the run-off would be between Le
Pen and the centrist Emmanuel Macron, with Macron beating the
far-right candidate comfortably in the second round.
But investors are rethinking that assumption. A poll from
Ifop on Tuesday put Melenchon in third place, ahead of the
conservative Francois Fillon and just four points behind Macron,
and confirmed that almost one-third of voters are still
The late surge for Melenchon, who wants to slap a 100
percent tax on the rich, leave NATO and renegotiate France's
position in the European Union, is spooking markets and prompted
a warning on Tuesday by the head of the business lobby group
Medef Pierre Gattaz.
The cost of hedging against volatility in the euro over the
next month against both the dollar and yen jumped to the highest
levels since the results of Britain's vote to leave the EU last
One-month risk reversals - a gauge of demand for options on
a currency rising or falling - fell to -4.175 vol, showing the
strongest bias for euro weakness since November 2011.
"The risks going into the first round of the election have
been underpriced by the market, especially with that new dynamic
introduced by Melenchon’s performance in the polls," said Credit
Agricole's head of currency strategy in London, Valentin
"The risk of having a far-left versus far-right second round
was on no one’s radar screen until now, and that latest
development is highlighting that such an outcome should not be
The euro hit a four-month low against the safe-haven yen
in a broad flight to safety as investors sought refuge
from the risks surrounding the French election as well as
growing tensions between the United States and Russia.
FRENCH BOND DUMP
"French political risk is back!" read an ABN Amro research
note on Monday afternoon.
"The gap between (Macron and Le Pen) and Mr Melenchon is
about 5 percent of the votes, which seems small considering that
approximately 30 percent of voters are still undecided."
In debt markets, the gap between French 10-year government
bond yields and their German equivalents stretched to its widest
in six weeks.
Japanese bank Nomura said on Tuesday it would enter an
"outright short" position to bet against French government bonds
if Melenchon were to face Le Pen in the run-off on May 7.
Japanese investors, who are large holders of French debt and
are therefore seen as a proxy for foreign investors, dumped a
record amount of French bonds in February, data from Japan's
Ministry of Finance showed on Monday.
(Additional reporting by Helen Reid; Editing by Tom Heneghan)