BNP Paribas on what’s priced into FX markets with upcoming French elections

• Indicators suggest valuations and positioning are not at stretched levels.
• EURUSD valuations are far from having overshot in the move lower.
• Reinforces conviction for appealing risk-reward to hold short EUR exposure.
• Elections compound the scope for downside.
• Positions not near extreme levels, indicating scope for further shorts to be added ahead of the event.
• Recommends EURJPY shorts

Looking at EURUSD 1-month risk reversals it does make a case that risk premiums might not be reflecting enough risk. But when we consider the OAT/Bund spread that paints a different picture.

Looking at the same chart horizon, we can see that spreads have baked in a lot of risk premium. So, even though I agree that some measures suggest more risk can be priced in, there are others that suggests that markets have priced in a lot already.

I’m of the opinion that if markets were truly exceptionally fearful of a far-right majority or a hung parliament (which looks like the two most probable outcomes) then we would have seen more downside being priced in.

The fact that we are not seeing it means maybe markets feel what is priced now adequately reflects those two outcomes.