Euro Rescued by Macron, Dutch Poll Finds Echo in Options, Charts

  • Bearish bets on Europe’s shared currency are receding
  • Momentum studies suggest Euro Index may seek year-to-date high

Macron Leads the Pack Following First French Debate

The euro is approaching its strongest level this year, supported by a change in the European Central Bank’s rhetoric, a less hawkish-than-expected Federal Reserve and easing concerns over populist sentiment across the currency bloc.

A read-out of some key gauges that measure investor sentiment, together with options positioning, technical charts and flows, suggests greater resilience may be in place.

French Risk

The euro-dollar exchange rate touched 1.0800 for the first time in more than a month on Tuesday after polls showed French centrist candidate Emmanuel Macron was the most convincing in an overnight presidential debate.

The average implied probability of far-right presidential candidate Marine Le Pen winning, based on bookmakers’ quotes, has declined this month, prompting euro-bearish bets to be trimmed on perceived tail risks.

While euro-yen risk reversals on the three-month tenor remain in favor of puts over calls, bearish sentiment has waned from the highest in five years seen last month.

The result of the Netherlands election has seen an unwinding of euro-short positions, according to traders in Europe, who asked not to be identified as they aren’t authorized to speak publicly. The premium to hold out-of-the-money euro puts compared to calls trades at 307 basis points, down from 505 basis points a month ago.

Haven Help

Demand for the Swiss franc, a haven asset, seems to be waning. The currency is headed for its first monthly loss after rallying for six straight months through February. An analysis of the volatility smile on the euro-franc two-month tenor shows that demand for a drop in franc calls has coincided with anti-Islam Freedom Party’s failure to win the Dutch elections.

Given the unwinding of risk and the dollar’s weakness since the Fed meeting, euro bets turned bullish in the front end. Two-week risk reversals on the euro-dollar rose above par on Monday for the first time since the U.S. elections in November. While the gauge has since turned negative, it’s now near the least pessimistic on the single currency since the start of the year.

Technically, there are no signs so far that the euro’s rally is ready to reverse anytime soon. Momentum studies such as the Fear-Greed Indicator, MACD and Trendstall suggest that the Bloomberg Euro Index is on course to touch a fresh high for the year above the peak seen on Feb. 1 at 855.28. Resistance is about 0.4 percent higher at 855.73-856.81, where the 233-daily moving average and the 50 percent retracement of the pair’s drop this year stand.

  • Traders note leveraged investors have been squaring their euro-shorts, while macro accounts have added outright longs in both the cash market and through upside in options. Euro-dollar, which has a weighting of 46.5% in the Euro Index, has turned to a buy-the-dip pair, with selling interest from real-money investors not seen until 1.0950-1.1000 area.
  • Earlier, Euro Strength May Upset Forecasts as Downside Limited: Analysis
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