April 20, 2017 / 10:47 AM / 3 months ago

FOREX-Euro, currency volatility jump ahead of French election first round

4 Min Read

* Gains for euro, sterling prod dollar index lower

* Euro on course for best week this year

* But weekly rise in 1-week volatility most since launch of euro

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Patrick Graham

LONDON, April 20 (Reuters) - The euro jumped around half a percent against the dollar on Thursday as some traders shut down broad bets against the common currency and French assets ahead of the first round of presidential elections on Sunday.

The countdown to the French vote, which polls suggest will usher far-right candidate Marine Le Pen into a two-person runoff next month, has seen market measures of implied currency volatility surge week-on-week by the largest extent since the launch of the euro.

However, the euro itself has firmed, gaining 1.5 percent since the start of a shortened trading week on Tuesday to reach its highest level since the end of March. By 1030 GMT it was up 0.45 percent on the day at $1.0760.

Traders said short-term players were closing out positions taken in anticipation of euro weakness into the vote, in part emboldened by the steady drip of polls confirming that centrist candidate and favourite Emmannuel Macron would lead returns on Sunday.

"Squaring up may be a factor," said BMO strategist Stephen Gallo. "Short euro is still one of the larger positions out there. No risk on the table means take some of that off. So you would take off your euro shorts, take off your short OAT positions and put your money under the mattress."

"(But) there is still no fundamental reason for the euro to be rising here."

The stakes for investors in Sunday's vote are high, with both Le Pen and another anti-European Union, anti-euro candidate -- the far-left Jean-Luc Melenchon - among the top four.

Another trader at a major bank in London said he had seen substantial demand for options structures hedging investors against volatility in the currency, but said that was driven by the need to protect against a fall rather than a rise.

"The narrative that the outcome of the election is looking better in recent weeks is simply WRONG," Deutsche Bank strategist George Saravelos wrote in a brief note to clients on Thursday morning's price action.

"All four main contenders are within 4 points, well within the 6 point margin of error in previous elections.

"Market behaviour is starting to look worryingly similar to the run-up to the Brexit and Trump votes where investors started to overweight marginal shifts/info in polls, creating a self-reinforcing belief that things are OK," he added.

Traders also said that the moves came amid a broadly weaker tone to the dollar, which sold off across the board on Tuesday as faith in continuing U.S. economic outperformance and the Trump administration's promises of tax reform wavered.

The dollar index was down 0.2 percent on Thursday, also falling sharply against sterling and the New Zealand dollar before regaining some poise.

"We still expect the dollar to strengthen a bit more into the end of year, but I acknowledge risks that the dollar has peaked," said Barclays strategist Hamish Pepper.

"The data has started to look slightly more inconsistent than it was, and there is the doubt over what we will get on the fiscal front."

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Danilo Masoni, editing by Gareth Jones)

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