Thought Leadership - Fifth Third Bank

Currencies of Note in Today’s Market

There are 3 specific currencies that are currently interesting in this otherwise rangebound market: the Euro, the JPY, and the MXN.

The Euro has recently slipped from the 1.0900 level due to political risks on the Continent, particularly the snap elections called by Macron in France. European voters pivoted to the right recently, sending shockwaves throughout the current political establishment, and markets took notice. French bonds were at their weakest to German bonds since 2012, a time when markets were concerned about Europe’s debt sustainability. The Euro has seen weakness since the election results were out, falling from 1.0900 to near 1.0700. While the move in spot isn’t extraordinary, we do want to point out the move in Euro options. The cost to hedge against Euro weakness relative to Euro strength blew out to levels not seen since March of 2023’s Silicon Bank crisis but has since recovered a bit. Note on the graph below that the fear for a weaker Euro in the options market is nowhere near where it got to during the Ukraine invasion of Feb/March 2022. Also noteworthy is the fact that the Euro has seen election fear before, in 2017, when Marine LePen was up in the polls. She has recently commented that she would be willing to work with other parties, so the panic in the Euro options market has subsided a bit. Political developments will continue to require monitoring, but European political risks have historically not been a serious threat to the value of the Euro.

The JPY continues to show weakness and is right back at levels where the BoJ intervened in late April. The psychological 160.00 is here and will be crucial to hold. A close above 160 would send us back to 1990, opening the door to 1986’s 164.00. The being said, the normally tight correlation between the US 10yr yield and USDJPY has currently broken down with the 10yr pivoting and heading lower since the end of May and USDJPY finding renewed ascent since then. The two don’t usually stay apart for long, so either US yields need to come higher or USDJPY is overvalued here.

Finally, the once mighty MXN has been taking a beating recently, and that is purely on the back of election results there. Claudia Sheinbaum was elected president on June 3rd, and her Morena party dominated the field, sparking concern in the markets that far left policies may be more easily implemented. The Peso saw a swift weakening, touching 19.00 at its weakest, but has since calmed down rather significantly, currently trading around 17.90. The Peso was at 17.00 just before the election and hit a mid-April high of 16.2616. We feel the reaction was a bit overdone, and the option market agrees. The cost to hedge against MXN weakness has now collapsed back to levels we saw back in April and is now well below last October’s level when US yields were soaring higher, and the dollar was rampaging against all currencies. To see the market trading below that level gives us confidence that the Peso has seen it worst days during this current political paradigm.