Euro Drops as Upside Exposure Demand Rises Around Election Dates

  • Dollar erases Friday loss while March hike odds keep dropping
  • Major currency pairs stay near important technical levels

A light data calendar this week shifted currency traders focus toward developments in euro area political risks, upcoming speeches by Federal Reserve members and any possible further verbal intervention by the Trump administration on the dollar.

The euro dropped below a $1.0750 handle, lingering near the middle of its $1.0685-$1.0829 range of late. Leveraged names look to fade dips in the common currency, traders in London and Europe said, while Morgan Stanley strategists look for a move below parity on the back of the peripheral spread widening not being priced in. While views diverge on the next leg of the common currency versus the greenback, some macro accounts are adding upside exposure on expiries around the French presidential elections, one of the traders added.

Uncertainty over the elections remains. The spread between four-month implied volatility -- a tenor that captures a possible second round on May 7 -- and the three-month rose Monday to its highest level since mid-December at 0.48 vol. Demand for owning upside exposure in euro-dollar around the event may be due to the fact that a Marine Le Pen victory is still a tail-risk event while at the same time low delta euro calls are relatively cheap.

  • EUR/USD bids extend within 1.0700-20, with more seen near 1.0680 and 1.0640-50, the traders say. Real money offers above 1.0820 in place though have dropped in size since Friday
  • The Bloomberg Dollar Spot Index stays above the important 61.8 percent Fibonacci retracement support of its post-U.S. election rally, yet it fails to sustain a comforting rebound for bulls. The chances of an interest-rate rise in March by the Fed keep dropping this month, standing at 28 percent according to Fed funds futures, compared to 34 percent before the U.S. January employment report was released
  • USD/JPY holds above 111.99, the 38.2% Fibonacci retracement of the pair’s rally since U.S. election, yet lower daily closes this month make a test increasingly possible. Options-wise, interest turns to the two-month tenor that captures March meetings of Fed and BOJ, as demand for gamma on longer tenors drops and the spread between one-month implied volatility and one-year drops to par, the lowest this year
  • Cable was also near important technical support above 1.2410 early in London session, managed to recover and trades little changed at 1.2482
  • USD/CAD is lower a third day, drops slightly to 1.3015. A close below the figure would be the first in nearly five months and could ignite further losses as risks for the loonie seem to be outright skewed to the positive side. Dollar trouble could also emerge from GBP/CAD that looks set to break support at 1.6200-20
  • Scandinavian currencies are on the back foot Monday, lead losses versus the greenback; USD/NOK +0.5% at 8.2480 after data showed Norwegian industrial production declined in December
  • Some information comes from FX traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
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