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From the Floor: France spread widens on election worries — #SaxoStrats

   • Markets fraught with geopolitical worries
   • Spike in French election jitters caused widening of France-Germany spread
   • USD outlook likely to remain hazy until French presidential election: Hardy
   • EURJPY slides on renewed worries about French vote
   • Plenty of pent-up demand for covering risk into two-round French election
   • 'It’s all about April 23 and May 7 – the two dates for the French elections': Hardy
   • Yellen’s message on Monday was 'indifferent': Hardy
   • US Treasuries stay up in the range
   • Yields dropped back in quiet volume on Monday
   • A first ECB rate move is getting closer than it has been in years: Boye
   • ECB corporate bond buying data showed uninterupted buying despite taper: Boye
   • Daily average corp. bond buying up to 483m euros from 367m long-term average

Saxo Strats banner
By John Acher

A jump in the polls for the French leftist presidential candidate Jean-Luc Melenchon has injected new worries into fixed-income and forex markets, with the French yield spread over Germany widening to its biggest gap since February and the euro falling against the Japanese yen in particular.

Markets are widely fraught with geopolitical anxiety, from heightened tensions in Asia and the Middle East to the new spike in French political jitters and persistent uncertainty about the policies of the Trump administration in the US.

Those geopolitical concerns are keeping oil prices elevated, risk appetite nervous and the yen bid.

“Over the weekend, we’re getting this ongoing focus on geopolitical concerns, but especially the spike in French elections worries on the surging results in the polls for the far-left’s Melenchon and the kind of scenarios it creates has seen the France-Germany spread widening,” says Saxo Bank’s FX strategy chief John J Hardy. (See also Hardy's latest FX Update here.)

Melenchon’s new strength in opinion polls appears to have turned the two-round French presidential election into a four-way race and has created the possibility of a second-round run-off May runoff between the far-left candidate and the populist right-wing contestant Marine Le Pen, according to news reports.

French voters will go to the polls in the first round of the election on April 23, and a second round would follow on May 7 if no candidate wins a majority in the first ballot.

Because of the heightened worries, the US dollar has been unable to grab the spotlight, while the euro has been dented and EURJPY has slid steeply, Hardy says.

“It doesn’t appear that we are going to get much in terms of a dollar outlook until we get to the other side of the French presidential election and see how much pent-up demand there is for the euro and how it reacts there,” Hardy says.

“So the general pattern is for the high-beta trade to be euro downside to Japanese yen upside, and that is what you are seeing of course in the chart here, as we see the tremendous slide in EURJPY,” Hardy says.

EURJPY slides
EURJPY slides
Source: Saxo Bank

A speech on Monday by US Federal Reserve chief Janet Yellen was “indifferent” and provided no new direction, Hardy says.

Yellen said the policy focus is moving to holding growth gains rather than stimulus – “whatever that means, basically not saying much and certainly not addressing specifically the whole balance-sheet unwinding issue,” Hardy says.

Saxo Bank fixed-income trader says the tone of Yellen’s speech sounded like the Fed “are comfortable with where they are and that they will raise rates, but certainly don’t feel that they are behind the curve.”

Core yields generally dropped back a bit in low-volume trading on Monday.

US Treasuries held firm and were a little bit higher in yesterday’s session, with the 10-year yield dipping by 4 basis points to 2.34%, while 10-year Bund yields have approached year-low territory, Boye says.

German 10-year yield approaches year lows
German 10-year yield
 Source: Bloomberg

To start the week the France-Germany yield spread has widened out to close to the widest for the cycle, and euro-dollar volatilities to cover the French election dates of April 23 and May 7 have also spiked.

EURUSD volatilities spike
Volatilties spike
Source: Bloomberg 

“So there is a lot of pent-up worry and demand here for covering your risk on euro into this election,” Hardy says.

Markets were looking forward to fresh CPI data on Tuesday from Sweden and the UK, Eurozone industrial production figures and Germany’s April Zew survey.

Low liquidity in the Easter holiday week in Europe could accentuate moves in rates and currency markets.

Jean-Luc Melenchon
 A surge in opinion polls for the leftist Jean-Luc Melenchon has turned the French presidential election into a four-way race. Photo: Shutterstock

John Acher is a consulting editor at TradingFloor


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