(Drop in political risk bets in euro reut.rs/2jj9mJv)
By Patrick Graham
LONDON Jan 6 If you believe the past
fortnight's shift in the pricing of currency market derivatives,
bankers' concerns that Marine Le Pen may win French presidential
elections in May and send another political shockwave through
the euro zone may be easing.
As the attached chart shows, six-month risk reversals
- a measure of the balance of bets for and against
the euro in options markets - surged to their strongest in
almost two years in favour of the dollar in November, when the
contracts first began to cover the French election dates. reut.rs/2jj9mJv
That move was also fed by stronger dollar expectations that
kicked in after Donald Trump won the U.S. election on Nov. 8,
adding to the concern over the strong ratings of Le Pen in
French presidential polls.
But while pricing of yen or sterling equivalents has
remained steady since the U.S. Federal Reserve raised interest
rates in mid-December, those for the euro have retreated
substantially, reflecting, traders say, a change in market
sentiment around the May 7 vote in France.
"People have given up on some of the election concerns and
you can see that most clearly in the six-month risk reversals,"
said the head of hedge fund sales with one large U.S. bank in
London. "Clients are less focussed on the European political
risk story than they were a month ago."
A Reuters poll on Friday showed that the dollar is expected
to keep strengthening against the euro in the months ahead, with
even chances of reaching parity this year.
But the dollar's progress has halted over the past three
weeks in the face of more doubts over Trump's policies, a bout
of year-end profit-taking and, this week, a robust defence of
the yuan by Chinese authorities.
"Maybe people have reduced their expectations of downside,"
said Bank of Montreal strategist Stephen Gallo, asked about the
change in risk reversal pricing.
"It is difficult to get a clear reading (from options
pricing) but the consensus is that it is going to be very hard
for Le Pen to get in."
(Graphic by Alasdair Pal, editing by Larry King)