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Summary
- EUR/CHF has retraced all the down move following the European election results and the snap French election call, both on 9 June.
- The pair dropped almost 2% between the close of business 7 June and close of business on 18 June.
- EUR/CHF rallied modestly after the SNB rate cut on 20 June but has gained greater upside momentum this week after the first round of the French legislative election showed the far right is unlikely to win a majority in the second round.
Market Implications
- EUR/CHF shows FX markets are sanguine about the likely result of Sunday’s (7 July) French vote. There is a small chance of a pullback, but we think EUR/CHF will remain rangebound, probably between 0.9500 and 0.9900 in the coming months.
- With EUR/CHF trading near the middle of our anticipated range, we stand aside in the pair, waiting for the extremes to initiate a position.
EUR/CHF Has Had a Choppy Few Weeks
During political turmoil in the European Union (at either EU or member-state level), one of the best market risk barometers is EUR/CHF.
Alongside other fixed income havens like German bunds or US treasuries, in FX the Swiss franc is the currency of choice to be long on any flight-to-safety.
Especially when the political turmoil is on Switzerland’s doorstep.
After the European elections on 9 June, in which the French far right fared strongly, French President Emmanuel Macron called surprise snap legislative elections, roiling markets.
EUR/CHF sold off sharply, falling about 2% in the week or so following the announcement as investors sought the safety of the franc.
French Election First Round Result Flipped the Dynamic
After bottoming out near 0.9500 on 20 June, EUR/CHF has grinded higher, to currently trade at ~0.9725.
This up-move gained momentum after the inconclusive results of first-round voting on 30 June, with the pair rallying ~1.3% so far this week.
Chart 1: EUR/CHF Spot Rate = Orange Line
Centre and Left Parties Unite to Block Far-Right Majority
The key driver for this has been Macron’s centrist group and a left-wing alliance working to pull their candidates out of 223 runoffs, to avoid splitting the vote against the far right, according to Le Monde newspaper.
A poll by Toluna-Harris Interactive shows the centrist/left strategy will prevent a far-right majority in the Assemblée nationale after Sunday’s second round vote.
The Harris poll has the far right getting between 190 and 220 seats, significantly less than the 289 needed for an outright majority.
This would almost certainly lead to a hung parliament and legislative gridlock.
We think this explains why EUR/CHF has rallied this week.
With the threat of a far-right parliamentary majority abating, the market is concluding something resembling the French political status quo will continue, and hence FX haven demand for CHF has also abated.
Bond Markets Express Long-Term Worries Over France
Markets still have medium-to-long-term concerns over French politics.
Despite pulling back from the recent high, the French 10-year OAT yield remains elevated. Though this has been the trend throughout 2024.
Chart 2: 10-Year French OAT Yield = Orange Line
A better gauge of market angst over long-term French politics is the 10-year OAT/Bund spread.
Chart 3: 10-Year OAT/Bund Spread (in bps) = Orange Line
Although the 10-year spread has narrowed considerably from the widest level seen this time last week (echoing EUR/CHF price action), the yield premium for 10-year French OATs over 10-year German bunds remains elevated.
We think this reflects the medium- and long-term concerns over French politics and public finances.
In addition to the expected gridlock and policy intransigence to almost surely follow Sunday’s result, there remains the medium-term concern over the difficulty of passing a budget later this year.
Moreover, the 2027 French presidential election remains in play, with political uncertainty at the heart of Europe in the long-term set to loom over markets.
Short-Term Jitters Relent, but Medium-/Long-Term Issues Remain
In the short-term, the FX and rates markets have breathed a collective sigh-of-relief over political developments in France this week.
However, over the medium-to-long-term, French political uncertainty will remain a front-and-centre issue for markets.