Euro: Why do France-linked spread risks keep EUR unattractive? – ING

The euro has so far faced little material pressure from widening French OAT-Bund and OAT-BTP spreads, according to ING's Francesco Pesole. However, he cautions that sensitivity to French sovereign risk could quickly resurface if spreads near 200bp. His outlook for EUR remains broadly bearish: he identifies EUR/CHF as a key proxy for sovereign risk and sees scope for EUR/USD to re-test 1.1120 should bond market turmoil continue.

Could Wider French Spreads Undermine Euro Stability?

"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.)