Forex
Euro Correlation with Eurozone Spreads Picks Up Rapidly
Fiscal troubles for the euro may be more than just a temporary issue. The currency's correlation with widening eurozone spreads has historically increased rapidly, and recent events in France are adding to concerns.
The French government's budget announcement has put OATs at risk of underperformance, which could negatively impact the EUR/USD exchange rate. If things don't improve, the EUR/USD may see significant downside risks, potentially leading to further depreciation.
The situation is not limited to the EUR/USD, as the EUR/CHF also faces similar potential for decline. The French-German 10-year spread has reached 130bp, a level that historically correlates with eurozone spread widening.