Euro struggles against Canadian Dollar as French political crisis spills across Eurozone

EUR/CAD extends its losses for the third consecutive day, trading around 1.5770 during European hours on Wednesday. The currency cross is losing ground, weighed down by ongoing headwinds facing the Euro (EUR) as market experts warn that the effects of the French political crisis are spilling across the broader Eurozone.

French spread widens as budget concerns meet rising unrest

Analysts at ING report that French bonds came under renewed pressure, with the 10-year OAT-Bund spread “widening to 157bp at one point, close to the 159bp 2 October high.” They note that “lingering concerns about the budget are clearly being compounded by rising social unrest,” adding that their France economist “discusses here the potential economic implications of the riots.”

Eurozone entrants highlight persistent spread gap for Hungary, Poland and Romania

BNY Mellon’s Geoff Yu points out that, “even after a decline of nearly 250bp in Hungary’s 10y yield, its borrowing spread over 10y Bunds remains higher than in 2018.” He notes that Hungary’s spread is “also well above those of Croatia and Bulgaria – the most recent entrants to the Eurozone,” underlining the funding advantage enjoyed by new Eurozone members. Yu adds that “Polish and Romanian borrowing spreads are even higher and also barely changed from 2018 (Exhibit 4),” reinforcing the view that non-Eurozone Central European sovereigns continue to face a structural premium in long‑term funding costs relative to their Eurozone peers.

Meanwhile, the commodity-linked Canadian Dollar (CAD) is drawing strength from higher crude oil prices. Energy markets gained support as traders evaluated mixed reports regarding diplomatic engagements between the United States and Iran.

Broader market momentum faced headwinds following high-level diplomatic discussions in Tehran, where Pakistan’s army chief, Field Marshal Asim Munir, met with senior Iranian leaders. Clarifying the status of talks with Washington, a diplomat involved in the discussions confirmed that conflict resolution efforts are ongoing while dismissing reports of an imminent final agreement as premature.

Canadian Dollar firms as BoC hike expectations are sharply repriced

Analysts at MUFG/BTMU report that the Canadian Dollar has been underpinned by a marked shift in domestic rate expectations, noting that “the Canadian dollar has been boosted by the hawkish repricing of BoC rate hike expectations.” They highlight 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,” underscoring the speed and scale of the move in BoC pricing.