EUR steady despite French budget gridlock – BBH

EUR/USD recovered to 1.1740 from yesterday’s low near 1.1685. French Prime Minister Sebastien Lecornu will meet with lawmakers today for crunch talks ahead of the October 13 budget deadline. To rally support from opposition parties, Lecornu ruled out using a constitutional clause to force the budget through, BBH FX analysts report.

Lecornu faces tough talks ahead of October 13 deadline

"However, France’s political gridlock makes reaching a fiscal compromise nearly impossible to achieve. The National Assembly is deeply divided, with no single party holding a clear majority. Bottom line: the political and fiscal turmoil in France can further widen French OAT-German Bund yield spreads but it’s unlikely to meaningfully weigh on EUR as the situation remains country-specific and not systemic."

"In Q2, the EUR share of global FX reserves rose to 21.13% vs. 20.00% in Q1. However, by holding exchange rates constant, its share would have fallen to 19.96% in Q2. A major obstacle to the euro gaining greater prominence in global central bank FX reserves is the limited supply of highly rated European assets.    "

"Indeed, ECB Governing Council Member Francois Villeroy highlights that the total amount of European safe assets outstanding (almost $10 trillion) accounts to barely 33% of US Treasuries (over $30 trillion). Villeroy proposes three ways to increase the supply of European safe assets that could collectively add up to €8.5 trillion: (i) Merging existing supranational debt, (ii) Transforming existing national sovereign debt into genuine European sovereign debt, (iii) Creating and rolling over new supranational debt."