The FX euro vol market is complacent compared to the bond market, seeing the resilient 10y OAT-Bund spread. This relief offers an attractive entry point to hedge a large euro downside move via options. The 3m downside skew in euro crosses retraced sharply, and almost fell to last year levels in the EURUSD and EURGBP (see above graphs).

The EURJPY and EURCHF skew are also materially less expensive, with, in particular, the EURJPY 3m risk reversal returning below -3 from -5. Indeed, the 3m ATM vol is not that high compared to the spot level, further suggesting designing a long vega hedge.

The likely victory of a market-friendly candidate would redirect attention to ECB tightening, propelling the euro gradually higher.

On the contrary, a Le Pen victory would imply an immediate and significant bearish impact.

FX/bond correlations elect a short EURJPY as the best hedge. A scenario with the OAT Bund widening to 150bp would send the EURJPY to 108 and the EURUSD to 0.99.

A one-touch option takes advantage of the complacent relief in skew, benefits from a rise in downside vol and is the best way to catch a short-lived bottom in spot.

Buy EURJPY 3m one-touch knock-in 108 @ 13% (7 times leverage).

Rationale: The likely victory of a market-friendly candidate would redirect attention to the modalities of ECB tightening, propelling the euro gradually higher.

In contrast, a Le Pen victory would have an immediate and significant bearish impact.

FX/bond correlations elect a short EURJPY as the best hedge.

A scenario with the OAT-Bund widening to 150bp would likely send it to 109.