Euro comes under pressure against Canadian Dollar as French political crisis reverberates across Eurozone

• EUR/CAD falls as political unrest in France undermines sentiment towards the euro.
• With the 10-year OAT-Bund spread widening towards 157bp, French bonds come under fresh pressure amid budget worries and growing social unrest.
• Higher crude prices lend support to the commodity-linked CAD after conflicting reports on US-Iran diplomacy.

At around 1.5770 during Wednesday’s European trading hours, EUR/CAD is heading lower for a third consecutive day. Persistent pressures on the euro (EUR) continue to weigh on the cross, with market experts warning that France’s political crisis is having repercussions across the wider Eurozone.

French bond spread widens amid budget worries and growing 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,” while their France economist “discusses here the potential economic implications of the riots.”

New Eurozone members retain borrowing advantage over Hungary, Poland and Romania

Comparing borrowing costs across the region, BNY Mellon’s Geoff Yu 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 is “also well above those of Croatia and Bulgaria – the most recent entrants to the Eurozone,” he notes, highlighting the financing advantage available to the newest members. His further observation that “Polish and Romanian borrowing spreads are even higher and also barely changed from 2018 (Exhibit 4),” supports the view that Central European sovereigns outside the Eurozone still pay a structural premium for long-term funding compared with their Eurozone counterparts.

Higher crude oil prices are also supporting the commodity-linked Canadian dollar (CAD). The energy market found support as traders assessed conflicting reports about diplomatic contacts between the United States and Iran.

Following high-level talks in Tehran between Pakistan’s army chief, Field Marshal Asim Munir, and senior Iranian leaders, broader market momentum encountered resistance. A diplomat involved 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.

Canadian dollar gains support as markets sharply reprice BoC rate hikes

A substantial adjustment in domestic interest rate expectations has supported the Canadian dollar, according to MUFG/BTMU analysts, who say that “the Canadian dollar has been boosted by the hawkish repricing of BoC rate hike expectations.” Explaining the shift, 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,” illustrating how rapidly and significantly expectations for BoC policy have changed.