French political crisis spreads across Eurozone, pressuring Euro against Canadian Dollar

• EUR/CAD weakens as political unrest in France undermines sentiment towards the Euro.
• 157bp comes into view for the 10-year OAT-Bund spread as budget worries and mounting social unrest renew pressure on French bonds.
• Higher crude prices support the commodity-linked CAD as markets assess conflicting reports on US-Iran diplomacy.

EUR/CAD trades near 1.5770. The cross is declining for a third consecutive day during Wednesday’s European session. Persistent pressure on the Euro (EUR) is driving the losses, with market experts warning that France’s political crisis is affecting the wider Eurozone.

157bp spread reflects French budget worries and mounting unrest

Renewed selling pressure on French bonds pushed the 10-year OAT-Bund spread wider, according to ING analysts, who describe it as “widening to 157bp at one point, close to the 159bp 2 October high.” In their assessment, “lingering concerns about the budget are clearly being compounded by rising social unrest”. They add that their France economist “discusses here the potential economic implications of the riots.”

2018 comparison reveals persistent spread premium for Hungary, Poland and Romania versus Eurozone entrants

The funding advantage of recent Eurozone entrants is evident in a comparison highlighted by BNY Mellon’s Geoff Yu. He observes that “even after a decline of nearly 250bp in Hungary’s 10y yield, its borrowing spread over 10y Bunds remains higher than in 2018.” Hungary’s spread, he adds, is “also well above those of Croatia and Bulgaria – the most recent entrants to the Eurozone”. Yu further notes that “Polish and Romanian borrowing spreads are even higher and also barely changed from 2018 (Exhibit 4),” supporting the view that Central European sovereigns outside the Eurozone still pay a structural premium for long-term funding compared with their Eurozone peers.

Higher crude oil prices are also lending support to the commodity-linked Canadian Dollar (CAD). Conflicting reports on diplomatic engagement between the United States and Iran supported energy markets as traders assessed the developments.

High-level talks in Tehran created headwinds for broader market momentum. Pakistan’s army chief, Field Marshal Asim Munir, met senior Iranian leaders there. A diplomat participating in the discussions clarified the position on talks with Washington: efforts to resolve the conflict remain under way, but reports suggesting a final agreement was imminent were premature.

25bps BoC hike repricing supports Canadian Dollar

A substantial shift in domestic interest rate expectations has supported the Canadian Dollar, according to MUFG/BTMU analysts. They state that “the Canadian dollar has been boosted by the hawkish repricing of BoC rate hike expectations.” To illustrate the adjustment, they note that “the Canadian rate market has moved to more fully price in a 25bps hike as soon as next week,” with “around 21bps of hikes priced in compared to only 9bps at the end of last week,” highlighting how rapidly and substantially BoC expectations have changed.