EUROPEAN FISCAL: French Fiscal Consolidation Intact; More Proposals Due In July
The 10-year OAT/Bund spread is currently ~67bps. That’s still well above the 40-50bps range seen before the snap Legislative Election announcement in May 2024, but below the 70bp handle that provided a floor for the spread through much of H2 2024 and Q1 2025.
- An unwind of immediate domestic political risks and post-Liberation Day tariff concerns has been supportive of spread narrowing, However, markets should still be cognizant that the Bayrou administration is held up by fragile cross-party agreements, which could unravel if future policy proposals ostracize one- (or both) end of political spectrum.
- The French budget deficit was E69.3bln in April, compared with E91.6bln in the same month last year. The improvement relative to 2024 was due to higher tax revenues (E99.6bln vs E69.7bln a year ago). The press release notes that “this difference is explained by the absence of recording of certain revenues collected at the end of April 2024, due to the temporary closure of the Chorus application” (Chorus is a government portal used for business-to-government transactions).
- Despite this caveat, current YTD tracking suggests budget consolidation continues to progress. However, more fiscal tightening is expected to be delivered for the administration to meet its 5.4% 2025 and 4.6% 2026 budget deficit targets.
- Speaking to BFM TV last week, Bayrou noted that the government will seek E40bln in spending cuts in the next budget, for which proposals will be presented in early July. It is unclear at present what measures might be included as part of the package. Bayrou did add he "could take up" the issue of "social VAT", which consists of compensating for reductions in contributions weighing on employment by increasing VAT."
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USDCAD TECHS: Hits Bear Trigger, New Cycle Low
- RES 4: 1.4415 High Apr 1
- RES 3: 1.4296 High Apr 7
- RES 2: 1.4087 50-day EMA
- RES 1: 1.3906/3935 High Apr 17 / 20-day EMA
- PRICE: 1.3793 @ 17:00 BST May 2
- SUP 1: 1.3760 Low Apr 21 and the bear trigger
- SUP 2: 1.3744 76.4% retracement of Sep 25 ‘24 - Feb 3 bull run
- SUP 3: 1.3696 Low Oct 10 2024
- SUP 4: 1.3643 Low Oct 9 ‘24
The trend set-up in USDCAD deteriorated further Friday, with prices slipping through the bear trigger to narrow the gap with next support. The fresh cycle low reinforces the bear cycle and signals scope for a continuation near-term. Potential is seen for a move towards 1.3744, a Fibonacci retracement. Moving average studies are in a bear mode position, highlighting a dominant downtrend. First resistance to watch is 1.3943, the 20-day EMA.
AUDUSD TECHS: Consolidation Phase
- RES 4: 0.6550 61.8% retracement of the Sep 30 ‘24 - Apr 9 bear leg
- RES 3: 0.6528 High Nov 29 ‘24
- RES 2: 0.6471 High Dec 9 ‘24
- RES 1: 0.6470 High May 2
- PRICE: 0.6445 @ 16:59 BST May 2
- SUP 1: 0.6344/6316 Low Apr 24 / 50-day EMA
- SUP 2: 0.6181 Low Apr 11
- SUP 3: 0.6116 Low Apr 10
- SUP 4: 0.5915 Low Apr 9 and key support
AUDUSD remains inside a consolidation phase, having traded either side of the 0.6400 level for 10 consecutive sessions. The underlying trend remains bullish and the pair is trading close to recent highs. Price has recently breached a key resistance at 0.6409, the Dec 9 ‘24 high. This breach reinforces bullish conditions and signals scope for a continuation higher near-term. Sights are on 0.6471 next, the Dec 9 2024 high. Initial key support to monitor is 0.6316, the 50-day EMA. A clear break of this EMA would be a concern for bulls.
US TSYS: Rates Retreat, Sentiment Improved Though Trade Risk Remains
- Treasuries look to finish near late Friday session lows after trading firmer on the open, higher than expected Nonfarm payrolls at 177k (sa, cons 138k) of which private contributed 167k (sa, cons 125k) triggered the early reversal.
- However, two-month revisions of -58k offset the 39k beat for nonfarm payrolls, with a similar story for private (a 42k surprise vs -48k two-month revision).
- Stocks are back near four week highs - pre-"Liberation Day" levels as hopes of some trade deal being made improved sentiment.
- The Wall Street Journal reports that "Beijing is considering ways to address the Trump administration’s gripes over China’s role in the fentanyl trade... potentially offering an off-ramp from hostilities to allow for trade talks to start." The Journal notes that "discussions remain fluid" and China "would like to see some softening of stance from President Trump".
- Currently, the Jun'25 10Y contract trades -20 at 111-07.5 vs 111-02 low -- initial technical support (50-dma) followed by 110-16.5/109-08 (Low Apr 22 / 11 and the bear trigger). Curves bear flattened, 2s10s -3.480 at 48.002, 5s30s -4.911 at 86.807.
