EUR/GBP, EUR/CHF, EUR/USD flows - who comes out on top in a winter of discontent?
Euro propped by positioning, expiries, though crosses still slip
Near-term stretched action aside, big picture focus could increasingly revolve around politics of discontent
CHF carry continues to be challenged, and retraced, by its socio-economic safety
A fairly quiet US session ahead, tending to leave the focus squarely on Europe. It’s notable that while France had the most extreme disorder at the weekend, Italy and Portugal also saw disruptive and sometimes violent protests. So that does keep one eye on widening contagion even with current action France centric versus periphery.
There is distinct widening on the day for France but nothing that marks a fresh escalation on the last couple of weeks’ weaknesses. Wider spillover does come through the monetary transition channel though with Lagarde already suggesting the bond pressure has a downward impact on forecasts versus Sep. So while the ECB wont directly intervene there can be secondary impact through the ECB rates outlook.
Options potentially helping to keep impact limited too, along with the dollar positioning factor. The larger options over coming few days are skewed more to the 1.1265-1.13/15 zone than lower.
Big picture, with the market widely long dollars versus many counters, the skew towards euro underperformance looks to remain entrenched. EUR/GBP has support nearby that has held today and the cross is a bit oversold but major multi-year range levels further down remain objectives further out.
If discontent and political eruptions become a deteriorating factor in coming weeks and into the winter, then relatively protected Switzerland starts to come back more and more into its own despite its recent stand-out carry appeal in better risk running summer times. EUR/CHF remains in significant retracement mode. US politics, centred around the midterms, remains a wildcard further in the melting pot, and in some circumstances CHF political/fiscal/social considerations could become yet more prominent in the FX market’s weighting matrix.