News & analysis


Politics remained the focus for markets yesterday. While the unwind in election risk premia proved durable in DM markets following the first round of the French election, in emerging markets the relief rally was quickly unwound as traders turned their attention to concerns over the US bond market and the upcoming Presidential election. This saw the South African rand reverse course throughout the day, leaving it to record a 1.77% swing from peak-to-trough even as major investment banks turned bullish on South African assets. We have recently updated our forecasts on USDZAR from 19.00 to 18.00 over the upcoming three-months, noting the constructive political developments but a level of caution over the governability of the coalition moving forward.

Back in DM markets, the outcome of the French election was the main story in town. Nowhere was this more visible than in EURCHF. The currency cross rallied three quarters of a percent as election hedges were unwound and the SNB’s preference for a weaker franc was heeded.  EURUSD on the other hand rallied only 0.22%, with the move restricted by the lingering risk of a National Rally majority and a bid in Treasury yields on the news that the US Supreme Court granted Trump some immunity for trying to reverse the 2020 election results. While the US Presidential election tends to have a limited impact on markets this far out, that isn’t the case this election cycle. The increasing risk of a second Trump term is already having a binding effect in spot and options markets, with traders bracing for more inflationary and risk-negative policies at a time when inflation is proving persistent and global growth weak, all of which supports defensive flows into the dollar.

As mentioned, politics were the main focus for markets yesterday. This meant the ISM manufacturing PMI had little effect, even as the headline index defied expectations and printed a touch softer at 48.5. That said, the impact was also muted by the fact that weaker employment and current activity indicators were partly offset by improving new orders and upward revisions to previous months, keeping Q2 growth tracking at a fairly healthy pace.

Today, JOLTS job openings data for May is released. Once a highly influential measure for markets, the data now has limited impact seeing as the openings-unemployment ratio has returned to pre-pandemic levels, although the extremes. Instead, we suspect the focus for markets this afternoon will be on the ECB central banking forum in Sintra as opposed to the data. Chair Powell is set to speak alongside the head of the ECB and the Brazilian central bank at 14:30 BST. Powell’s characterisation of the data since the last inflation report and Fed meeting on June 12th will be key, with markets only pricing a 2 in 3 chance of a rate cut from the Fed in September.


The relief rally in markets following the first round of the French election saw the CAC 40 rally over a percent, yield spreads narrow by 5 basis points, and the euro rally by 0.22% against the dollar. This was a tempered response, leaving French equities deeply negative over the past 30 days, yields spreads close to record highs, and the euro three quarters of a percent lower since Macron announced the dissolution of the National Assembly. The restrained rally in European markets was in line with our read on the election results – while the risk of an outright majority for National Rally suffered a blow, it is still a realistic possibility. This is best reflected in one week EURUSD risk reversals, which at -0.8925 show the cost of hedging EURUSD downside in relation to upside is as expensive as it was in late 2022 during the end of the eurozone energy crisis, although this is almost a third lower relative to the end of last week.

As noted yesterday, we continue to favour short EURNOK and EURGBP expressions as a hedge to the lingering French election risk as lighter positioning and supportive macroeconomic fundamentals limit losses in the extent that National Rally fall short of a majority, while historically they have proven a good hedge in the event yield spreads widen further, as expected under a National Rally majority.

While an eye will be kept on the French election today as candidates have until 6pm local time to register for the second round this weekend, meaning greater clarity will be provided on how the left and centrists plan to unite to combat the far-right, the ECB’s central bank conference in Sintra should be the main focus for much of the European session. Notable speakers include Governing Council member Isabel Schnabel at 11:30 BST and President Lagarde alongside Chair Powell at 14:30 BST. While we think the narrative from the ECB is likely to remain one of caution, leaving the odds of a second cut in July depressed, a more optimistic message from Powell could weigh on Treasury yields and lift EURUSD to as high as 1.08, especially if this is corroborated with softer ISM services data on Wednesday and a more balanced labour market report on Friday.


The reaction to the French election results was the primary driver for sterling on Monday, although it ultimately left GBPUSD unchanged on the session with GBPEUR falling by just 0.2%. While the upcoming second round is likely to continue as a background theme for the pound this week, sterling traders can now turn their attention to the UK general election on Thursday. A large Labour majority looks all but guaranteed, but the risk of a Conservative wipe-out is likely to keep markets just a little nervous ahead of the July 4th poll. With this in mind, it will not be the seat projection for Labour we are looking for in the exit polls. Rather, we expect to see the pound soften if the Conservatives secure less than 100 seats, below which it becomes increasingly difficult to pose an effective parliamentary opposition. That said, for now markets have taken a relatively sanguine view of these elections, suggesting to us that the most likely outcome on Friday morning is that Gilts, equities and sterling are all little moved. Perhaps more interesting though is the impact that the election has had elsewhere in the economy. A number of activity indicators have surprised to the downside in June, a point reinforced by yesterday’s manufacturing PMI which saw a downwards revision in its final publication, with some firms noting uncertainty around the general election. Similarly, the BRC shop price index released this morning also undershot expectations in June, rising by just 0.2%, down from 0.6% in May and below the 0.5% growth expected by markets. For now we are inclined to chalk up this downshift in growth indicators to election effects. But further signs that slowing growth momentum is set to be more persistent would suggest more structural downside risks for sterling.


Despite a holiday disrupted Monday due to Canada Day, USDCAD still posted gains of almost 0.5% to start the week, with the upwards impetus coming from a soft set of ISM manufacturing PMIs south of the border. While having little impact on other dollar pairs, given the implications for growth across North America, the surprise slowdown weighed notably on the loonie as traders struggled to differentiate between a US soft landing and the possibility of something more sinister. This is consistent with our longstanding view that current economic conditions imply a narrow dollar smile, an environment where CAD is likely to struggle, especially given soft economic conditions domestically and the need for the BoC to lead the easing pack, eroding the loonie’s carry protection. With this in mind, despite June’s Canadian Manufacturing PMI scheduled for release today, traders will be focused on JOLTS and an appearance by Fed Chair Powell in Sintra for further guidance on North American growth outlook, with further signs of US economic weakness likely to see further USDCAD upside.



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