EUR/USD: Three sub-plots to the story - SocGen

Kit Juckes, Research Analyst at Societe Generale, explains that in 2015-2016, real yield differentials correlate better than nominal ones and in the last few weeks the Euro has under-performed these as the trend in peripheral spread in European bond markets has once again become important which gives the EUR/USD story three separate subplots this week.

Key Quotes

“Firstly, the resounding victory of Francois Fillon in the second round of the French Republican Primary installs him as front-runner for the Presidential election next year, with polls suggesting he would win a second round run-off against Marine Le pen. That’s helping the Euro but the focus will now be on the independent candidates who may emerge, in particular Francois Bayrou from the centre-left. If he were to dilute the right-wing vote enough, and the leftwing were to field a credible candidate, M Fillon’s passage to a second round run-off wouldn’t be as clear cut as the polls currently suggest.”

“The second sub-plot is the Italian constitutional reform referendum this weekend. BTP/Bund spreads are close to their wides as the implications of a possible ‘no’ votes are debated. New elections are unlikely and the most recent opinion poll suggests only 15% of Italians want to leave the Euro, but the FT warns of the threat of a ‘no’ vote to Italian banks, and there are concerns about implications for the country’s credit rating, too. The third sub-plot is much more mundane but on Friday we can get back to the US labour market. We look for another 165k increase in non-farm-employment, a 4.8% unemployment rate and 2.8% wage growth. Consistent with a December rate hike but a familiar story all the same and one that leaves us thinking that well over 90% of the widening trend in Treasuries/Bunds is already behind us. Further EUR/USD weakness will be much more about European politics than the relative growth trends.”