The French Connection

France’s fiscal crisis and social unrest are weakening French assets and the euro, while stronger Chinese growth supports the renminbi despite weak domestic demand.

• French public anger over living costs and deteriorating school conditions is compounding the budget crisis, widening the French 10-year yield premium over Germany and weighing on EUR/USD near 1.1200.
• ECB backstops should contain spillovers to other eurozone economies; a break below EUR/USD 1.1111 would expose the pair to a deeper decline.
• Canada’s September headline CPI is expected at 3.2% year on year versus 3.0% in August, while core CPI is forecast at 2.1%; core inflation above 2% would increase the likelihood of a 25-basis-point Bank of Canada hike to 2.50% on October 28, currently priced at 66%.
• The Australian dollar is near the top of its three-week 0.6900–0.7000 range and is estimated by the IMF to be 17% overvalued on a real effective exchange-rate basis, although interest-rate differentials do not yet signal immediate downside.
• China’s real GDP grew 1.2% quarter on quarter in Q3, above the 1.0% consensus, but retail sales growth remained at 1.1% year on year and non-real-estate fixed-asset investment fell 4.2%.

Takeaway: Investors should expect continued pressure on French assets and monitor Canada’s inflation data for CAD direction, while the bearish USD/CNH trend remains intact despite doubts about the quality of China’s growth.