EUR: Gauging near-term risks – Standard Chartered

According to Nick Verdi, Senior FX Strategist at Standard Chartered, the French presidential election is one of the key upcoming risks for the EUR.

Key Quotes

“Recent polls suggest that independent centrist candidate Emmanuel Macron will win the first round and a second-round run-off, although his lead has narrowed over National Front candidate Marine Le Pen in recent weeks. Second-round polls since 4 April have Macron winning 59-63% of the vote against Le Pen.”

“A stronger-than-expected showing by Le Pen in the first round or even fast-rising farleft candidate Jean-Luc Melenchon could rattle euro-area risk assets and undermine the EUR. One-month implied EUR-USD option volatilities now cover the first (23 April) and second (7 May) election rounds. Implied one-month EUR-USD vols have rallied sharply as a result (12.6525), but are trading shy of the June 2016 highs (16.3200). Risk reversals chime with higher implied vols, with EUR-USD puts (25delta 1M) trading at a 3.7% premium to calls. Risk metrics are stretched, but could extend further if Le Pen surpasses expectations on 23 April, with the France-Germany 10Y government bond spread already rising.” 

“The ECB is likely to exercise caution at its upcoming policy meeting, which should temper expectations for a more hawkish stance in the near term. Still-low core euroarea inflation (0.7% in March) and weak earnings growth suggest that a QE tapering discussion for the Governing Council is off-limits until mid-year or beyond.”