It might not seem like it, but the euro is finding itself in a rather uncomfortable spot in trading today. While EUR/USD is holding up relatively better amid the broader market turmoil, EUR/CHF is perhaps telling us a more worrying story about the risks building in Europe.
The latest drop today sees the pair briefly touch its lowest level in three months, slipping to 0.9220 levels now as the Swiss franc draws renewed support from its traditional safe-haven appeal. But what is driving that?
Well, it’s the thing we have been talking about every so often in the past two weeks, that being France’s fiscal plight. And the worries are now growing rather quickly as French 10-year government bond yields have surged above 5%, hitting their highest levels since 2002.
Besides that, the France-Germany 10-year yield spread is now widening towards a staggering 170 bps – its highest since 2011. It wasn’t just too long ago that we were talking the line in the sand at 150 bps. All of a sudden, we’re now nearly 20 bps up from that. The latest surge is another sign that investors are demanding a much higher premium to hold French debt, amid growing fiscal and political uncertainty.
Looking at the EUR/CHF chart, we’re already seeing some of those worries translate into price action. After all, France is Europe’s second-largest economy and concerns there will have the potential to spill over into broader European assets and the euro.
The pair has already broken below its trendline support from the March to May lows, before surrendering the key 0.9300 level as the 100-day moving average (red line) also gave way. And the latest decline is now also challenging to break the 200-day moving average (blue line) around 0.9235.
A sustained break below that could invite a deeper push towards 0.9200 initially, before the June to July lows may offer a bit of support around 0.9180. Beyond that, the next notable downside level sits closer to 0.9100.
As for the Swiss franc side of the equation, let’s not forget that the SNB had only recently toned down its language on foreign exchange intervention. The central bank hinted at less urgency to push back against franc strength. But with European risks now escalating and EUR/CHF threatening a more meaningful technical breakdown, I wonder if policymakers might soon have to reconsider that stance.
For now though, the EUR/CHF chart is certainly not giving the euro much reason for comfort as it arguably best captures the risks surrounding European bond markets.
This article was written by Justin Low at investinglive.com.