The past two years have provided enough political shocks in major currencies to give analysts a decent guess at what might happen to the euro around the French elections. Nomura reckons that so far, the currency is following a similar script in the run-up to the French vote as sterling did before the Brexit referendum last June.

Implied volatility for the euro – a measure of expected shake-ups – has already been creeping up, and the Japanese bank is predicting further climbs as the election draws closer, with a peak immediately before the vote.

Nomura analysts Jordan Rochester, Yujiro Goto and Sam Bonney argue that 3-month options on the euro against the yen have become “the new de facto ‘Frexit’ market proxy”, and, with around 60 days to go before the second round of the French election, are following a similar (if obviously not identical) pattern to comparable measures in the run-up to last year’s Brexit vote.

Euro/Yen volatility has fallen back somewhat in the last few days along with other gauges of Frexit fears such as the Franco-German bond spread, but the Nomura team reckons it will continue to trend upward with only temporary dips in the coming weeks.

However, if previous occasions – including Brexit, the US election and the Scottish independence referendum – are anything to go by, volatility should peak a few days before the actual election, as traders reposition or try to take advantage of the earlier moves.

From their report:

FX vols have tended to rise prior to the event and then fall aggressively in the days preceding it. This is partly because historically, the market tends to take advantage of what are ‘perceived to be’ attractive levels for the ‘more likely outcome’ and nearly prices out the tail risk completely.

While FX vols are already expensive for over the event risk, we wouldn’t be surprised to see them continue higher for now given the real risk of a market upset if the tail risk were to become reality.

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