Euro falls against Canadian Dollar amid French debt crisis
- The Euro weakens as France's political deadlock and rising yield spread spark fear of broader contagion.
- French political gridlock and widespread social unrest have severely dampened investor confidence, heavily depressing the Euro recently.
- Higher oil prices could strengthen the commodity-linked CAD, placing further downside pressure on the EUR/CAD cross.
EUR/CAD inches lower after posting modest gains in the previous day, trading around 1.5960 during European hours on Monday. The currency cross depreciated as the Euro remained subdued amid growing concerns that France’s spiraling debt crisis could spill over into other heavily indebted Eurozone nations. A toxic cocktail of political deadlock ahead of next year's presidential election and spreading social unrest in France has heavily weighed on investor sentiment, crushing the Euro over recent weeks.
France spread risk highlighted as OAT–Bund gap hits multi-year extreme
HSBC Asset Management points out that the 10-year OAT–Bund spread has now “widened to its highest level in 15 years,” underscoring how concerns over France’s fiscal trajectory and political backdrop are being reflected in sovereign bond pricing.
The EUR/CAD cross may further lose ground as the commodity-linked Canadian Dollar (CAD) may draw strength from bullish sentiment in the energy markets. Crude oil prices showed signs of regaining ground following a series of deadly attacks on Riyadh’s King Khalid International Airport by Houthi militants, including a Sunday strike that followed a previous attack leaving 12 dead and over 300 injured. The escalating violence has prompted US President Donald Trump to consider joining Saudi Arabia in retaliatory actions against the Iran-backed Houthis in Yemen.
Further heightening regional energy supply risks, a drone targeted an oil tanker near the Sohar anchorage off Oman over the weekend, just outside the strategic Strait of Hormuz. Despite recent signs of higher crude exports from the Persian Gulf, these persistent geopolitical threats highlight ongoing vulnerabilities in global oil shipping routes and continue to support crude prices.
Canada’s trade sovereignty stance weighs on exporters
Rabobank analysts highlight that Canada’s decision to prioritise “full sovereignty over trade decisions” is now feeding through to the real economy. They note that Canada “famously spurned the United States’ offer” of closer alignment, a move that has “come at a cost for Canadian exporters who had typically sent approximately two-thirds of their products into the US market.”
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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