Yen Remains in the Defensive

Markets

French PM Lecornu’s resignation was the latest domino in the country’s domestic political crisis triggered by President Macron’s snap elections last summer. On the president’s request, Lecornu will remain in a caretaker role with a Wednesday evening deadline to hold final talks with political blocks to explore the ability to nevertheless form a government. In case of a positive outcome to talks, Macron will name a new prime minister – which would be the sixth since 2022 – to try align the country’s hung parliament to pass a budget as soon as possible. The official October 13 deadline is impossible to make, so in first instance we’ll be looking at emergency legislation to extend this year’s budget. If deliberations between now and Wednesday lead to nothing, Macron will have little choice but to dissolve parliament and call another snap election. Those two-round votes would need to take place 20-to-40 days later implying a huge tail risk of (EMU) uncertainty in the run-up to and around early November. New presidential elections (normally 2027) are Macron’s final options, but seem unlikely. He’s constitutionally barred from running again and current opinion polling gives a good chance that extreme right leader Bardella (RN) comes out on top; a risk the centrist President is probably unwilling to run. The French 10y swap spread temporarily rose to a new YTD high at 89 bps before closing at 86 bps. European stock markets underperformed the US. Losses ranged between 0.4% for the EuroStoxx50 to 1.36% for the French CAC40. The single currency underperformed with EUR/USD sliding from 1.17+ levels to an intraday bottom at 1.1650 before rebounding into the close. EUR/GBP ended at 0.8685 from a start at 0.8725. We expect this “precaution” to persist into Wednesday evening. Yesterday’s overall modest reaction implies that markets currently go with the muddling through scenario of appointing yet another new PM. We think they severely underestimate the risk of new parliamentary elections which could have a more profound (negative) impact on the likes of the euro and French assets.

Today’s empty eco calendar won’t inspire, leaving ample room for political themes to play out. The Japanese yen remains in the defensive (USD/JPY 150.50 & EUR/JPY 176) as money markets reduce the likelihood of a BoJ rate hike at the end of this month following after Abenomics-cheerleader Sanae Takaichi won LDP leadership elections this weekend, becoming new PM. Yesterday’s 15 bps increase at the very long end of the curve, did lure better than average buying interest in this morning’s 30-yr JGB auction. The US Treasury starts its mid-month refinancing operation with a $58bn 3-yr Note auction today, but (market) focus) will be on 10-yr and 30-yr sales tomorrow and on Thursday.

News & Views

In a podcast released yesterday, Hungarian Prime Minister Victor Orban said he would prefer lower interest rates as he tried to revive economic growth in the country. The Hungarian prime minister is heading for elections next year and his party falls behind the opposition in the polls. Orban admitted that it is the task of MNB governor Varga and his monetary policy committee to set the policy rate. At the same time, he described the approach of Varga as cautious and he also acknowledged that such a cautious approach is needed to protect the forint’s stability. At the same time, he assessed that at 6.5% the policy rate is already higher than it should be. In its (fiscal) policy, the Hungarian government already to some extent ‘sidesteps’ monetary policy as it provides subsidies for mortgages and other loans. This weekend the government also announced to offer additional loans for small and medium sized companies (fixed rate 3%) up to a cap of HUF 150mn. The forint yesterday declined marginally (EUR/HUF 388.6), but is holding near the strongest levels since June last year.

Australian consumer confidence declined for the second consecutive month. The Westpac index declined 3.1%, having already dropped 3.5% in September. At 92.1%, the index suggests that more people are turning pessimistic than optimistic (100% is balance reference). Both the current conditions index (-2.8%) and the expectations component (-4%) declined. Families in particular turned more negative on personal finances, both over the previous year (-4.8%) and even more for the next year (-9.9%). The decline comes as the Reserve Bank of Australia last week left its policy rate unchanged at 3.60% because of signs that the disinflation process might be slowing and as labour market conditions remain rather tight. The Aussie dollar this morning eased marginally (AUD/USD 0.6605) but holds a tight short-term range between 0.65 and 0.67.