- Indicators suggest that valuations and positioning are not at extended levels.
- EURUSD valuations are far from over the top in a downward move.
- Reinforces conviction to challenge the risk reward of maintaining short exposure to the euro.
- Elections exacerbate the scope of the downside.
- Positions are not close to extreme levels, suggesting there is room to add more short positions before the event.
- Recommend pants EURJPY
Looking at the 1-month EUR/USD risk spreads shows that risk premiums may not reflect enough risk. But when we look at the OAT/Bund spread it paints a different picture.
EURUSD 1M Risk Reflection
Looking at the same chart horizon, we can see that spreads have covered much of the risk premium. So while I agree that some measures suggest that more risk may be priced in, there are other measures that suggest that markets have already priced in more risk.
It is my opinion that if markets are truly exceptionally fearful of a far-right majority or a hung parliament (which seem like the two most likely outcomes) we will see more downside priced in.
The fact that we are not seeing that means that the markets may feel that what is being priced now appropriately reflects both of these outcomes.
Bundt oat spread