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Here’s a sign euro traders are dangerously complacent about the French election

Are markets underestimating the possibility of another nationalist upset? That’s the question on every traders’ mind as French citizens prepare to head to the polls on Sunday to vote in the first round of a hotly contested presidential election.

Read: How France’s election could spark market turmoil

A recent bout of short-covering activity in euro would suggest that they are, says Rabobank Chief Currency Strategist Jane Foley, who, in a research note published Thursday, called this trend “one of the notable, if overlooked, FX stories of this year.”

“Although euro shorts increased again this month, they stand well below the levels at the end of last year. This suggests that the euro is now more exposed to a negative shock,” Foley wrote.

The net dollar value of bets against the euro has declined sharply this year, according to data released by the Commodity Futures Trading Commission, which monitors positioning on U.S.-based futures exchanges like those operated by CME Group.

The data show that hedge funds and other speculators’ are holding a net-short position equal to about $2.5 billion. And although euro shorts have increased since the beginning of April, they remain well below the nearly $20 billion level reached in the aftermath of President Donald Trump’s upset victory.

Of course, this trade, along with a handful of other popular postelection plays, has reversed as Trump has struggled to unite the fractious Republican caucus behind his legislative agenda.

And adding to the tailwinds for the euro are data released in recent months that purport to show that economic growth and inflation in the eurozone are finally beginning to accelerate after years of stagnation following the financial crisis.

But both of these phenomena are distracting investors from what’s really important, Foley says. That is, that any of the four major candidates appear capable of making it into the final two-person runoff.

With shorts and longs almost evenly balanced, the euro looks vulnerable to a vicious drop should either of the establishment favorites, Emmanuel Macron and François Fillon, fail to advance to the second round. The worst-case scenario for the euro would be a runoff pitting right-wing,…

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