The euro is edging lower but holding up fairly well amid the latest market jitters over the continent’s upcoming elections (compared to bonds, at least). But that doesn’t mean traders are ignoring the currency, with demand to hedge against upcoming wobbles picking up.
The single currency is 0.6 per cent weaker against an upbeat dollar on Tuesday at $1.0545, and has weakened 2.3 per cent so far this month. The fall comes despite further signs of healthy growth in the eurozone economy, with figures from IHS Markit showing the currency bloc’s composite purchasing managers’ index has leapt to its highest level in almost six years in February.
That’s not exactly a stellar performance, but still puts the euro slightly ahead for the year to date, in contrast to expectations at the turn of the year that it could quickly hit parity with the dollar.
However, as ING points out:
while not necessarily reflected in the euro spot rate, the eurozone political risk is creeping more pronouncedly into euro/dollar implied volatility – with volatility premia for tenors covering the eurozone elections rising higher day by day.
Implied volatility tracks demand for options to hedge against big currency swings over a set period. Higher implied volatility reflects higher expectations of currency movements over the coming period.
Three-month implied volatility had been fading at the start of the year, but has jumped significantly since the options started to cover the weeks of France’s presidential election. The measure has also spiked noticeably as the travails of early frontrunner Francois Fillon prompted fears that Marine Le Pen’s populist Front National could win an unexpected victory.
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