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Euro Hits Three-Week High Amid Short Covering Before France Vote - BLOOMBERG

APRIL 20, 2017

by Vassilis Karamanis

  • Pound erases Wednesday drop as hedge funds add upside exposure

  • Dollar-yen holds near 109.00 level as large expiries gravitate

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Pricing the Rise of Melenchon in the French Election

The euro rose to its strongest level versus the dollar since March 29 as investors reduced short positions in the spot market before the first round of the French presidential elections.

Investors have cut back on hedging positions throughout the week, with euro-Swiss franc hitting a two-week high Thursday. Demand for fresh long exposure versus the dollar was also seen as euro bulls took comfort from $1.0700 support holding up, according to foreign-exchange traders in Europe and the Middle East. Downside exposure in the common currency is mainly expressed through vanilla puts and one-touch structures, albeit some unwinding also took place lately in the options market, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.

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While option pricing reveals the market is acknowledging the tail risks surrounding the French vote as a whole given a tight battle makes polling difficult, the risks seem to concentrate more on the first round of the elections. The premium for euro puts versus the dollar on the one-week tenor surpassed that of the one-month tenor for the first time Thursday. Front-end risk reversals, a gauge of market sentiment and positioning, hit their lowest level since the U.K. referendum to exit the European Union.

Underpricing or not the effect of the French elections, the market largely remains in a wait-and-see stance before the weekend. The realized volatility in euro-dollar on the one-month tenor has dropped since December, touching its lowest level since September 2014.

  • EUR/USD rises as much as 0.6% to 1.0776, triggering trailing stops on the way; offers seen extending to 1.0800
    • EUR/USD rallied earlier as Harris poll showed Macron to beat Le Pen 66%-34% in second round of vote
    • EUR/JPY up a fourth day, on its longest winning streak since December; extends rally to 1.9% this week to touch 117.50 day high
  • GBP/USD erases its Wednesday drop to gain as much as 0.5% to 1.2842; hedge funds are active pound buyers in both the cash and options market, the traders note
    • Strong demand for call spreads on over-the-counter trades, with lower band of strikes seen at 1.3200-1.3300
    • One-week risk reversals rose above par to reflect shift in momentum on the pound that looks beyond hard or soft Brexit and concentrates on increased political stability in the U.K.; GBP calls traded in premium for the first time in five months, reversed gains as the London session got underway
  • USD/JPY swung between gains and losses to hover close to 109.00 handle, where $2.4b expiries rollover Thursday
    • Kiwi rebounded from its biggest drop in two weeks after inflation data gave boost; it has since pared gains as Wednesday top capped and trades 0.2% higher at 0.7016

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