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We believe that political risk into the French elections is priced more appropriately in bonds (but not in currencies) than going into the Brexit and US vote.
In the remote scenario of a Le Pen Presidency with supportive government and Parliament, 10Y Bunds could approach 0bp and 10Y France-Germany 200bp, with sharply wider Bund swap spreads (54bp), FRA/OIS (20bp) and EURUSD cross currency basis (-60bp), and higher volatility (Bund implied 6bp/day).
Less extreme scenarios of Le Pen Presidency but cohabitation or extreme left Presidency will likely result in considerably less extreme outcomes.
Reflationary winds blowing through global markets have taken a sledgehammer to FX vols. Stay defensive for now as there is little value to selling vol at current levels, and re-assess after the tax/trade policy picture becomes a little clearer towards the end of the month.
French election risk premia in short-dated options are most acutely priced into EURJPY and EURCHF and least in EURCEE. Longer-dated (>1Y) ATMS EUR puts/USD calls also appeal as Europe hedges due to favorable carry/vol and tight risk-reversals.
EURCHF vols have richened lately but the spot is unlikely to stage much of a relief rally in the event of a benign election outcome. Consider buying 3M EUR calls/USD puts vs. EUR calls/CHF puts as a conditional post-election Euro-recovery expression.
In a nutshell, Euro and oil have a decent downside on a Le Pen victory: euro could fall about 10 cents (10%) to about 0.98 over a few weeks and oil could decline by 5-10%.
