BNP Paribas on what’s priced into foreign exchange markets ahead of French elections

• Indicators suggest that valuations and positioning are not at high levels.
• EURUSD valuations are far from overcoming their downward trend.
• Reinforces the conviction of an attractive risk-reward ratio to maintain a short exposure to the EUR.
• Elections add to downside risks.
• Positions that are not close to extreme levels, indicating the possibility of adding more shorts before the event.
• Recommends EURJPY shorts

Looking at EURUSD’s one-month risk reversals, it appears that risk premiums may not reflect enough risk. But if we consider the OAT/Bund spread, the picture is different.

Looking at the same chart horizon, we can see that spreads have priced in a significant risk premium. So while I acknowledge that some measures suggest that more risk may be priced in, others suggest that markets have already priced in a lot of risk.

I believe that if markets had truly been exceptionally fearful of a far-right majority or a hung parliament (which seem to be the two most likely outcomes), then we would have witnessed more drops in prices.

The fact that we are not seeing this may mean that markets believe that current prices adequately reflect both outcomes.