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London - The euro rose to its strongest level versus the dollar since March 29 as investors reduced short positions in the spot market before the first round of the French presidential elections.
Investors have cut back on hedging positions throughout the week, with euro-Swiss franc hitting a two-week high Thursday. Demand for fresh long exposure versus the dollar was also seen as euro bulls took comfort from $1.0700 support holding up, according to foreign-exchange traders in Europe and the Middle East.
Downside exposure in the common currency is mainly expressed through vanilla puts and one-touch structures, albeit some unwinding also took place lately in the options market, said the traders, who asked not to be identified as they weren’t authorized to speak publicly.
While option pricing reveals the market is acknowledging the tail risks surrounding the French vote as a whole given a tight battle makes polling difficult, the risks seem to concentrate more on the first round of the elections.
The premium for euro puts versus the dollar on the one-week tenor surpassed that of the one-month tenor for the first time on Thursday. Front-end risk reversals, a gauge of market sentiment and positioning, hit their lowest level since the UK referendum to exit the European Union.
Underpricing or not the effect of the French elections, the market largely remains in a wait-and-see stance before the weekend. The realized volatility in euro-dollar on the one-month tenor has dropped since December, touching its lowest level since September 2014.
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