A steadier euro and rallying French government bonds at mid-session on Thursday suggests that worries about the French general election, taking place in the spring, are fading.
Look below the surface, however, and there are signs that traders remain nervous.
First the good news. The yield on 10-year French paper dropped back below 1 per cent, crimping the spread with German Bunds to 66 basis points.
At one point this week, the implied premium over Bunds that Paris had to offer to sell its IOUs hit a four-year high of 78.5bp as investors worried about what a victory by the far-right candidate Marine Le Pen could mean for the country’s financial assets.
Meanwhile, the euro — which at one point on Wednesday was down 1.3 per cent for the week — was gently twitching back up around the $1.07 mark.
But forex traders are busy buying protection for euro weakness.
The final round of the French presidential vote takes place on May 7, which means that three-month options will cover the outcome.
Worth watching closely is the euro/dollar exchange rate three-month “risk reversal”.
It is a measure of the relative price investors are willing to pay for the volatility component of options to either buy or sell the euro.
When the risk reversal moves into negative territory, it means traders are keener to buy puts — which are bets that the euro will fall — than calls, which deliver profit if the euro rises.
The last time option buyers were this euro negative was around Brexit vote time.
Sample the FT’s top stories for a week
You select the topic, we deliver the news.