The Euro (EUR) continued its decline against the Canadian Dollar (CAD) on Wednesday, extending losses for the third straight day and trading around 1.5770 during European hours. The Euro's weakness is largely attributed to the ongoing political crisis in France, which is now affecting the broader Eurozone. Analysts at ING noted that French bonds faced renewed pressure, with the 10-year OAT-Bund spread widening to 157 basis points, nearing the October 2 high of 159 basis points. They highlighted that budget concerns and rising social unrest are exacerbating the situation.
Meanwhile, BNY Mellon’s Geoff Yu pointed out that Hungary, Poland, and Romania continue to face higher borrowing spreads compared to their Eurozone peers. Despite a significant decline in Hungary’s 10-year yield, its spread over 10-year Bunds remains elevated. Yu also noted that Poland and Romania’s borrowing spreads have barely changed since 2018, indicating a persistent structural premium for non-Eurozone Central European sovereigns.
The Canadian Dollar, on the other hand, is drawing strength from higher crude oil prices and a shift in domestic rate expectations. Analysts at MUFG/BTMU reported that the Canadian Dollar has been supported by a hawkish repricing of Bank of Canada (BoC) rate hike expectations. The market is now pricing in a 25 basis points hike as soon as next week, with around 21 basis points of hikes priced in, up from just 9 basis points at the end of last week.
Broader market momentum faced headwinds following high-level diplomatic discussions in Tehran, where Pakistan’s army chief met with senior Iranian leaders. A diplomat involved in the discussions confirmed that conflict resolution efforts with the United States are ongoing but dismissed reports of an imminent final agreement as premature.