Euro: EUR remains unattractive amid France-linked spread risks – ING

Wider French OAT-Bund and OAT-BTP spreads have so far had little material impact on the euro, according to ING’s Francesco Pesole. However, he cautions that the currency could quickly regain its sensitivity to French sovereign risk if spreads near 200bp. His outlook for EUR remains broadly bearish: EUR/CHF is a key proxy for sovereign risk, while persistent bond market turmoil could see EUR/USD revisit 1.1120.

Widening French spreads put euro stability at risk

"The OAT-Bund 10yr spread closed at 174bp after touching 178bp yesterday. That wasn’t the only EU sovereign spread widening yesterday; bunds outperformed (+9bp) on haven demand, and energy prices played a role too."

"But OATs saw the only increase in 10yr yields in Europe (+6bp), and the OAT-BTP spread has reached a grim 50bp milestone. The budget/political situation is not visibly deteriorating, so the move is probably a function of OAT’s simply having a higher beta to global factors and perhaps some concerns about another weekend of social unrest in France."

"The euro’s sensitivity to France has clearly diminished, with the common currency not materially underperforming G10 peers yesterday. That link may, however, re-establish very rapidly should a new pain level – perhaps 200bp – be breached. We aren’t expecting that much further widening for now, but the risks are clearly there, and the euro remains rather unattractive across the board."

"EUR/CHF remains the cleanest way to play European sovereign risk at the moment, while EUR/USD should be quick to re-test the 1.1120 14 October low should bond turmoil persist."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)