January 6, 2017 / 4:44 PM / 7 months ago

GRAPHIC-Euro options hint at cooling of French election worries

3 Min Read

(Drop in political risk bets in euro reut.rs/2jj9mJv)

By Patrick Graham

LONDON, Jan 6 (Reuters) - 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

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