Foreign Exchange

Short the euro to hedge against election risk, strategist says

Political risk is the one key downside for the euro: Credit Agricole

Political uncertainty is knocking the euro, and some experts are advising investors to short the common currency as a hedge against risk.

Upcoming elections in the Netherlands, France and Germany are holding investors' attention. In France, the possible election of Marine Le Pen for president would have a big impact on the euro if she pushed for a referendum on membership of the common currency or leaving the European Union.

Since the election of Donald Trump in November, the euro has dropped nearly 4 percent against the dollar. It is currently trading around $1.06 to the dollar.

Valentin Marinov, managing director and head of G10 FX research at Crédit Agricole, says further downside for the euro is likely and predicts it could fall to $1.04 or $1.03, as the euro is pricing in risks from the upcoming Dutch and French elections.

"The risks for euro/dollar are firmly on the downside from here," he told CNBC.

"We are short euro at the moment against the dollar, and we believe that short euro/yen is another interesting hedge going into the election. I describe it as a hedge because our central case is still that Le Pen won't win."

However, after the surprises of election in 2016 which defied pollsters' predictions, such as Brexit, Marinov says risks could increase and investors are advised to be cautious.

"Euro/yen is attractive especially, given that in the options space the markets are very short yen, which makes long positions in the currency space very attractive."

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However, other analysts are less concerned. Danske Bank's global head of FICC research Thomas Harr and analyst Aila Mihr say political events have not had much impact on the euro/dollar pair recently.

"Only Brexit vote and Trump have triggered strong movements in cross," they said in a currency report.

"One explanation could be the eurozone's large current account surplus, which makes it less reliant on external financing and vulnerable to changes in investor sentiment."

The impact of upcoming elections on the euro should be limited, as long as no major euro zone economy decides to leave the euro.

"Expect a strong move down in EUR/USD and a rise in volatility in case of a Marine Le Pen win as the market will look ahead to a possible euro referendum. However, it is still most likely that Le Pen will not be France's next President," they said.

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