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EUR Heads For Second Week Of Gains Ahead Of Tight French Election

EUR Heads For Second Week Of Gains Ahead Of Tight French Election

2017-04-21 19:40:00
Tyler Yell, CMT, Currency Strategist
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Will EUR Weather The Geopolitical Risk?See Our ForecastTo Find Out!

Talking Points:

  • EUR Optionality Shows Traders See Upside On EUR-favorable outcome
  • USD/CAD extends higher after soft-CPI
  • Oil Ends Roughest Week Since March After ~6% Decline

The ripple effects of the first round of the French Presidential election could be felt far and wide depending on the outcome Sunday. However, the markets that many traders are likely to focus on Sunday and Monday is EUR/USD, German Bunds, French Bonds (OATs), and Gold. EUR/USD is expected to trade volatile on the open Sunday after the vote has given us the contenders for the runoff on May 7th. As of Friday, the 1-day option straddle pricing per Bloomberg shows the breakeven at ~200 pips, which provides a possible price range of 1.05/09 from current Spot.

In addition to EUR/USD, many traders will be keeping an eye on German bunds which have been trending lower and a strong breakdown in the price of Bunds, which would align with the ECB’s forecasts could lead to a much stronger EUR/USD if the election outcome in France is “market friendly.” The chart below shows an inverted Bund price with EUR/USD overlaid. You can also see a correlation coefficient of 0.733 meaning that a breakdown in the Bund Price would likely push EUR/USD toward the 1.09 side of the expected range from the options data.

Of course, traders will undoubtedly be watching Gold, which has softened of late despite the geopolitical tensions with North Korea and the US as well as the wide-ranging outcomes from the French Presidential election. Despite recent softening, we’ve noted strong ETF inflow to Gold-focused ETFs as well as a stronger uptrend on the Daily Chart that looks set to carry Gold into the $1,300/oz category.

Lastly, we had CPI data come out of Canada this morning. The results were not good for CAD Bulls as the 1.6% print was shy of 1.8% expectations. The drop in CAD was enough to send it to the category of the weakest G8 currency on a relative ranking replacing AUD. The weak CAD aligns, though the correlation has waned, with Crude Oil that fell by ~6% despite positive fundamental developments. Many institutions remain upbeat on Oil as OPEC’s Technical Committee said on Friday in Vienna that the proposed 6-month extension was needed to help balance the market.

Interested In Seeing How Retail TradersAre Exposed Into The Election?Find Out Here!

Closing Bell’s Top Chart: April 21, 2017, Inverted Bund w/ EUR/USD Overlaid. Focus Here Post Election

EUR Heads For Second Week Of Gains Ahead Of Tight French Election

Next Week’s Main Event:

It’s not every day that we get to say the biggest market moving event of the week takes place on Sunday. Thanks to the French Election with a decidedly tight race that favors a May 7th run-off between Le Pen and Macron, we can say that today. The reaction we’ve typically had when an unexpected event came to pass (i.e. Brexit, Trump) has been an impressive rally in risk. We’ll see if we’re able to see CAC40, DAX, and EUR do the same.

IG Trader Sentiment Highlight:FTSE 100 Bulls Buy The Dip

EUR Heads For Second Week Of Gains Ahead Of Tight French Election

FTSE 100: As of April 21, retail trader data shows 58.9% of traders are net-long with the ratio of traders long to short at 1.43 to 1. The number of traders net-long is 10.0% lower than yesterday and 141.1% higher from last week, while the number of traders net-short is 3.3% lower than yesterday and 33.2% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests FTSE 100 prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed FTSE 100 trading bias.(Emphasis Mine)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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