Newsletter · 2026-10-01 · Ashutosh Agarwal

Euro Hits 16-Month Low as French Bond Spread Breaks Out - G10 FX & The Carry Trade - Week of October 1, 2026

G10 FX and carry-trade synthesis for the week of October 1, 2026. The euro fell to its lowest level against the dollar since May 2025 as the France-Germany 10-year spread broke out to 120-125 basis points, Japan's warnings knocked dollar-yen back below 157, sterling took Prime Minister Burnham's state-led agenda calmly, a dovish SNB weakened the franc, and the Aussie slipped below 0.70 after a reluctant RBA hike.

G10 FX & The Carry Trade

Week of October 1, 2026: Euro Hits 16-Month Low as French Bond Spread Breaks Out

On Monday this newsletter was all about Tokyo: dollar-yen knocking on 160 and Japan's finance minister promising to "act again." Three days later, the yen has calmed down a little. The trouble has moved to Paris.

On Tuesday the euro fell below $1.1325, its lowest level against the dollar since May 2025. The same day, the extra interest France pays to borrow compared with Germany hit a new high of 120 basis points. By Wednesday morning, Bloomberg Surveillance was reading out a headline that it had "just exploded out seven basis points to 125." (A basis point is one-hundredth of a percentage point, so 125 basis points means France pays 1.25 percentage points more than Germany on 10-year money.)

Those two moves are linked. Saxo's John Hardy said he had seen "at least 2 or 3 sources" making the same point: France's bond market is pulling the euro down.

Meanwhile, the US 10-year Treasury yield pushed past 5.25%. Junk-bond spreads widened for days in a row. And one well-known FX analyst said on Bloomberg that the currency market is still waiting for its real break. Let's get into it.

TL;DR

• The euro broke lower. EUR/USD traded "a handful of pips below" 1.1325, the lowest since May 2025, while the German-French 10-year spread hit a new high of 120 basis points (Saxo Market Call, Sep 30). Bloomberg Surveillance reported it at 125, up seven basis points in a session, with Italy's spread at 100 (Bloomberg Surveillance, Sep 30).

• French politics is now an April 2027 problem with a price today. Hardy points to the first round of the French presidential election on April 18, 2027. As things stand, he thinks the likely finalists are Marine Le Pen and Jean-Luc Mélenchon, which he calls "Scylla and Charybdis" for French debt (Saxo, Sep 30).

• Japan's warnings knocked dollar-yen off 160, for now. Currency diplomat Atsushi Mimura urged markets to "heed" Japan's warnings, and dollar-yen fell "solidly below 157" on Monday (Saxo, Sep 28). Strong 40-year and 2-year Japanese government bond auctions helped the yen hold up.

• The Swiss franc is weakening. The Swiss National Bank looked "so dovish relative to the backdrop" with rates still at 0%, and dollar-franc is at new local highs around 0.83 (Saxo, Sep 28).

• Sterling took Burnham's big speech calmly. The Prime Minister's Labour conference speech set out a state-led agenda on energy, water, housing and a new social care system. Sterling showed "reasonable firmness," but Hardy thinks social care "looks like a budget buster" (Saxo, Sep 30). The level to watch is EUR/GBP around 0.8610–0.8620.

• The Aussie dollar is running out of road. The Reserve Bank of Australia raised rates but sounded reluctant to go further. AUD/USD slipped below 0.70, which Hardy calls "the last gasp area for any bullish case" (Saxo, Sep 29).

• Exante's Jens Nordvik: the currency break hasn't happened yet. He expects currencies to move only when central banks step in to backstop bond markets. "We're not there yet. But I think this year is a transition year" (Bloomberg Surveillance, Sep 30).

What's new

1. France drags the euro to a 16-month low

This was the biggest move of the week, and it came from the bond market.

On Monday, Hardy noted the Germany-France 10-year yield spread was "still around 110 basis points, a huge concern there" (Saxo Market Call, Sep 28). By Wednesday it had hit a new high of 120. On the same episode, he said the euro "tested to new lows since May of last year," trading "a handful of pips below" 1.1325 before bouncing (Saxo Market Call, Sep 30).

He tied the two together directly:

"The German-France 10-year yield spread hit new highs and it's at 120 basis points... I think that's, you know, tracking with the euro-dollar."

Hardy's worry is about France's total debt, not just the government's. Citing a Russell Napier interview, he called France "definitely the basket case of Europe when it comes to the total debt load" once you add private debt to public debt. He contrasted it with the UK, "where yes, the sovereign debt load looks quite ugly... but the private sector is in a far different place." And he noted that "France has had the luxury of hiding behind the Eurozone," with the European Central Bank keeping bond markets orderly.

The timetable matters. Hardy flagged the first round of the presidential election on April 18, 2027. Macron's popularity has fallen so far that the likely finalists, "as things stand now," are the National Rally's Marine Le Pen and the left's Jean-Luc Mélenchon. Some argue French politicians will be forced into budget discipline because the problem is so obvious. Hardy is doubtful: "dance around it all you will as a French politician," and French voters "are of the yellow vest variety often." (The yellow vests were the large French street protests over fuel taxes that began in 2018.)

How bad it gets, he said, depends on global yields: it "will be aggravated if global yields are under pressure" and "could go away quietly for a time if yields ease back lower."

Bloomberg Surveillance gave the latest number on Wednesday: "Italian bond risk is now up in a full stick, 100 beats. French Germany has just exploded out seven basis points to 125" (Bloomberg Surveillance, Sep 30). Earlier in the show the hosts noted "the French curve is still steepening today." A steepening curve means long-term yields are rising faster than short-term ones. The commentary on the show was that curves are "more problematically steep in the places where the debt issues are the most severe."

A more extreme take. On The Bitcoin Layer (Sep 30), host Nik Bhatia called it "a sovereign debt crisis developing in France right now." His reading of the euro's fall is that Europe has made a choice:

"Europe is not stepping in here to defend its currency, it might be stepping in to defend its bond market and letting its currency go."

He is watching for "trial balloons, those whispers of European money creation" from the ECB. This is a commentator's view, framed around what it means for Bitcoin. No central banker has said anything like it. But it is a clear statement of the bear case for the euro: if the ECB ends up buying French bonds to cap yields, the currency takes the hit.

Inflation adds to the pressure. On Tuesday, Hardy flagged a "hot Spanish CPI number": 4.9% year on year against 4.6% expected and 4.3% before, with core inflation at 3.1% against 3.0% expected (Saxo, Sep 29). (Core inflation strips out volatile food and energy prices.) That matters for the ECB. As Bank of America said on Global Research Unlocked last week (Sep 25), a December hike is now the base case. Hot inflation alongside a widening French spread puts the ECB in a tight spot: higher rates help the euro but make France's debt harder to carry.

Why it matters for a book: J.P. Morgan's FX team said on At Any Rate last week (Sep 25) that its 1.13–1.14 EUR/USD target was getting close. It is now in that range. The France-Germany spread is the cleanest real-time signal of whether the euro breaks lower or bounces.

2. The yen: Japan's warnings work, at least for a few days

After last week's run at 160, Japan kept up the pressure.

On Monday morning, Hardy watched dollar-yen jump "way up into the high 157s," then turn sharply lower as Atsushi Mimura, Japan's top currency official, urged "markets to heed clear Japanese yen warnings." It ended up "solidly below 157." Hardy didn't think it mattered whether Japan actually intervened or just talked: "whether it was actual intervention or whether it was simply this Mimura quote that got the market heading lower, maybe doesn't really matter" (Saxo Market Call, Sep 28).

On Tuesday, Finance Minister Satsuki Katayama added that the US and Japan were "on the same page on intervention and not being comfortable with FX levels." The yen was "a little bit firmer in the crosses" (against currencies other than the dollar). But Hardy added a caution: "dollar yen is just unable to fall with the firmer and broader dollar." And the euro-yen chart "does still look pretty heavy" (Saxo, Sep 29).

Japan's bond market also helped. Hardy noted "a very strong 40-year JGB auction" on Tuesday, then "a strong 2-year auction" on Wednesday with "more follow-up strength in the Japanese yen overnight." (JGBs are Japanese government bonds. Strong demand at an auction shows buyers are willing to own Japanese debt, which supports the yen.) He said this emphasised "that the yen relative to the backdrop looks reasonably stable here."

One loose end: on Wednesday, Hardy was "a bit surprised" that yen crosses "were backing up as much as they were this morning" despite the strong auction. He asked whether that means "more frustration" for yen bulls or "just a little hiccup" around quarter-end (Saxo, Sep 30).

Washington is part of this too. On Bloomberg Surveillance, AllianceBernstein's Eric Winograd listed US participation in currency markets as one reason long-term Treasury yields are so high. "The Treasury Department changing its issuance calendar. We're intervening in FX markets. All of those argue for higher risk premium as well" (Bloomberg Surveillance, Sep 30). In other words, joint intervention may help the yen, but it comes with a cost in the US bond market.

Who's long yen? Andy Constan of Damp Spring Advisors, a former Bridgewater and Brevan Howard investor, said on The Julia La Roche Show (Sep 29): "I also have a slight long in the Japanese yen and a slight long, very slight long in short-term interest rates. I'm long a SOFR contract." He's betting on a stronger yen and on US short-term rates falling. Note the word "slight": this is a small position, not a high-conviction call.

The pundit case. Michael Pento of Pento Portfolio Strategies argued on Commodity Culture (Sep 29) that the yen carry trade is losing its fuel. (In a carry trade, investors borrow in a low-interest currency like the yen and invest in a higher-yielding one.) "The differential between JGBs and treasuries is closing, narrowing quickly. So that's cutting off the very... fuel of the yen carry trade." And if that trade unwinds, "you put more selling pressure on treasuries." Pento is a long-time bear on US debt, so read this as a view, not a forecast from a desk.

3. Sterling and the "end of Thatcherism"

The biggest UK event of the week was Prime Minister Andy Burnham's speech to the Labour Party conference on Tuesday.

Hardy built up to it on Monday. He called it potentially "the big sort of, you know, rubber hitting the road" moment on welfare, elderly care, the pension "triple lock" and taxes. His view going in: "If it's just simply a broad-based tax rises, I think that's going to play poorly." He also noted that "sterling... has gone pretty quiet," with euro-sterling getting up to "those levels that are so critical, zero spot 86, 10 or 20 or so" (0.8610–0.8620) (Saxo Market Call, Sep 28).

Hardy had his own suggestion. He pointed out that the UK taxes consumption and income heavily but has "extremely low taxes on housing, especially property taxes." His Texas-born comparison: a landowner "does not have to pay one penny, one pound in taxes" and can sit on land "and it appreciates at insane levels over time."

His verdict afterwards: "I think this was a speech that will be remembered for a long time as a key speech" (Saxo, Sep 30). Burnham set out a bigger role for the state: not "a mass nationalization," but the public sector "directing energy policy, water policy, housing policy." Hardy said energy and water don't have to cost that much. The expensive parts are housing and, above all, a new social care system for the elderly, run alongside the NHS:

"That's the pinch point... it looks like a budget buster from where I'm sitting. So how he signals who will pay for this will be really critical from here."

So far, he said, the market is "greeting this with, let's just see," and there was "actually reasonable sterling firmness." He credited Burnham's "pragmatic tone" on energy sources as "really key for whether this has any chance of flying."

Context from last week: on The Bitcoin Layer (Sep 25), the hosts noted that the Bank of England had paused its planned sales of gilts (UK government bonds) and stopped auctions until April 2027. That takes some selling pressure off gilts. A big unfunded spending plan would add it back.

Why it matters: Sterling's reaction was calm, but nobody has paid for the social care plan yet. Euro-sterling at 0.86 is the level to watch. If gilt investors start to worry about the cost, sterling is the obvious place for it to show up.

4. The Swiss franc: a dovish SNB at 0%

The Swiss National Bank meeting last week got a sharper reading this week.

Hardy called it "the most remarkable" of the three central bank meetings, one "that looked so dovish relative to the backdrop... this is a central bank that is still at 0% in this environment." The result: "a decent weakening of the Swiss franc," and "dollar-swiss actually at new local highs," around 0.83. He also pointed to "a bit of a gold angle," since gold is one of the SNB's key holdings and gold was falling (Saxo Market Call, Sep 28).

He then gave a useful lesson on why carry matters. When he started trading in late 2002, dollar-swiss "was at 150 at times" (1.50) and euro-swiss at 1.47. Holding francs instead of dollars from the start of 2003 to now looks like a 50% gain on the exchange rate alone. But once you count the higher interest you would have earned on dollars over those years, "instead of being up 50% or so, you would be up on the order of 6.4%."

The Turkish lira shows the same thing the other way round. Dollar-lira went from about 43 at the start of the year to about 49. On the exchange rate, a lira holder is down 14%. With Turkey's high deposit rates, "You would actually be up 11%."

His point: "you simply cannot take an exchange rate comparison and give it meaning over extended periods of time" when interest rates differ so much.

This fits what J.P. Morgan said on At Any Rate last week: with Japan threatening intervention, the franc and the Swedish krona are taking over the yen's role as the currency to borrow. A 0% SNB that sounds comfortable makes the franc a cheap currency to borrow in.

Exante's Jens Nordvik made a related point on Bloomberg Surveillance. Global bond markets mostly move together, "but... the most extreme example is Switzerland, right, where they have no debt. You don't have curve steepening there" (Bloomberg Surveillance, Sep 30). Swiss bonds aren't joining the global sell-off. That makes the franc a stable, low-yield currency to fund trades with, which is exactly what a funding currency needs to be.

5. Exante's Nordvik: currencies are waiting for the bond market to break

The most useful big-picture view of the week came from Jens Nordvik of Exante Data on Bloomberg Surveillance (Sep 30).

He started with where the action really is: "the epicenter of what has been happening over the last couple of weeks, couple of months really has been the fixed income market." Even equity investors' questions "are fixed income related now."

He then asked whether the dollar needs to "break as a change agent," with the dollar index (DXY) falling to "100, 99, 94." His answer is that currencies "haven't really moved that much," apart from the Korean won on the AI trade. The real move, he said, will come later:

"We're going to get to a point where the fixed income markets are going to be at a kind of breaking point where we're going to have to have some kind of intervention, right? We can't have 30-year yields continuing to go up, you know, every few months, 50 basis points."

He noted Treasury Secretary Scott Bessent's attempt to stabilise the market with buybacks "hasn't really had a huge impact so far." Eventually, he expects "some type of backstop from central bank balance sheet." And "that will be when the currencies react... We're not there yet. But I think this year is a transition year where we'll get to that point."

He added a new source of pressure on long-term bonds: AI data-centre borrowing. Exante's projections suggest bond issuance longer than 10 years from hyperscalers (the giant cloud and AI companies) "could be of roughly the same magnitude as the treasury." His aside: "If I come here and said this a couple of years ago, you'd probably kick me out of the studio."

Why it matters for a book: Nordvik's framework says the dollar's next big move depends on when central banks start buying bonds to cap yields. Whoever does it first (the Fed, the ECB for France, or the Bank of Japan) is likely to see its currency weaken. That's the same logic Bhatia used for the euro.

6. The US backdrop: 5.25% on the 10-year and rising stress

Behind all of this, the US bond market kept pushing.

On Tuesday, Hardy noted the 10-year Treasury yield breached 5.25%, a level it hadn't closed at since 2007. The dollar firmed further as a result (Saxo, Sep 29).

Stress is building slowly. The Bloomberg high-yield (junk bond) spread Hardy tracks went from about 265 a week earlier to 294 on Monday, 303 on Tuesday and 309 on Wednesday. He thinks it needs "at least another 40 or so before it starts to look anything remotely resembling amber," but "the direction is a concern" (Saxo, Sep 30). His broader financial conditions model is at "its worst state since... the Liberation Day tariff episode back in 2025." Notably, "FX volatility has picked up a bit. VIX is pretty calm."

On the Fed, AllianceBernstein's Winograd expects "a limited tightening cycle," calling it "a recipe for a constrained, gradual cycle rather than a rapid, aggressive one." He noted something unusual: "when the Fed was cutting rates, long bond yields were going up. And now that they've raised rates, long bond yields are still going up... that tells us that this cycle isn't really about the Fed." Core PCE inflation came in at 3% (Bloomberg Surveillance, Sep 30).

Two other details from Hardy on Wednesday. First, New York Fed President John Williams' comments "did punch rates pretty sharply lower" at the front end, which "helped the dollar back away from pushing through to new highs." Second, the jobs data is the key. JOLTS job openings came in under 7.1 million, the weakest in eight months. Hardy expects "the bigger flows will happen once that data is out of the way" after Friday's jobs report. Weak data is the "surprise side."

He also flagged a personnel change. Bessent has hired David Zervos, the well-known market commentator Hardy associated with Jefferies, for a role at the Treasury. According to Hardy, Zervos has argued the rise in Treasury yields is less about a fiscal crisis and "more about competition for capital," including all the debt being issued for AI data centres (Saxo, Sep 29).

7. Carry: the Aussie stumbles

The Reserve Bank of Australia raised rates on Tuesday, as expected. MUFG's Derek Halpenny had said on The MUFG Global Markets Podcast last week (Sep 25) that a hike was 90% priced in. But it was "a dovish hike, if you will," Hardy said, with "reluctance to continue to ratchet the rate higher" (Saxo, Sep 29).

The Aussie fell below the "psychological zero spot 70 level" (0.70), well under its 200-day moving average. Hardy's take:

"It's kind of getting into the last gasp area for any bullish case... It looks like a big consolidation range now after the failure pretty much of that rally to do anything to the upside."

That matters because the Aussie is one of the main G10 high-yielders. Last week, State Street's Tim Graf warned on Street Signals (Sep 24) that carry trades had become unusually calm, with correlations between high-yield currencies near 20-year lows. A rising dollar, wider credit spreads and rising FX volatility are the conditions that test that calm.

The debate

The bear case for the euro and the carry trade (well supported this week).

• France is now a direct drag on the euro. The spread is at 120–125 basis points, and the presidential race could be Le Pen versus Mélenchon in April 2027 (Hardy, Saxo).

• US 10-year yields are above 5.25%, and the dollar is firming with them (Hardy).

• J.P. Morgan's 1.13–1.14 EUR/USD target from last week has been reached.

• If the ECB has to step in to cap French yields, the euro is what gives (Bhatia, The Bitcoin Layer).

• Carry trades look stretched while credit stress and FX volatility rise: the Aussie fell through 0.70 after a dovish RBA hike.

The case for a dollar turn (a smaller group, and mostly about timing).

• Nordvik sees the dollar "finally" breaking once central banks start backstopping bond markets. But "we're not there yet," and he frames it as a year-long transition, not a near-term trade.

• Weak US jobs data is the risk Hardy flags. JOLTS was the weakest in eight months, and Williams' comments already pulled front-end yields down.

• Japan, apparently with US support, has shown it can push dollar-yen off 160. Constan holds a slight long in the yen.

Honest read: In the near term, the podcasts lean towards a stronger dollar against the euro and the high-yielders. The dollar-bear case is real but is about 2026–27, not next week. Nobody this week argued for EUR/USD at 1.20+ or cable at 1.40+.

Trades in play

• EUR/USD at 1.1325. That's the line that broke on Tuesday, the lowest level since May 2025. Hardy suggests watching it alongside the France-Germany 10-year spread, which has been "tracking with the euro-dollar." Friday's US jobs report is the trigger he expects for "the bigger flows."

• EUR/GBP at 0.8610–0.8620. Hardy called these "so critical" ahead of the Burnham speech. Sterling held firm afterwards. A move higher would signal the market has started to price the cost of social care.

• AUD/USD below 0.70. Hardy sees a big range forming after a failed rally and calls this the "last gasp area for any bullish case."

• USD/CHF at 0.83 and the franc as a funder. A dovish SNB at 0% pushed dollar-franc to new local highs. Together with J.P. Morgan's call last week on the franc replacing the yen as a funding currency, that supports using the franc to fund carry trades.

• Long yen, small. Constan has "a slight long" in the yen alongside a long SOFR futures contract, a bet that US short-term rates fall. Hardy's caution: dollar-yen is "unable to fall" while the broad dollar is firm, and euro-yen "still looks pretty heavy." A long-yen position against the euro, rather than the dollar, fits both views better.

Read-throughs

• EUR/JPY. Hardy says the chart "does still look pretty heavy." With France pulling the euro down and Japan defending the yen, this cross gets hit from both sides.

• EUR/CHF. A dovish SNB and a weaker franc ease pressure on Swiss exporters for now, but a French crisis would usually send money back into francs.

• Bunds vs French and Italian bonds. France is at 120–125 basis points over Germany and Italy at 100. Nordvik's point holds: curves are steepest where debt is worst, and Switzerland, with almost none, isn't steepening.

• Gilts. The Bank of England's pause on gilt sales helps. An unfunded social care plan would hurt.

• German industry. On Bloomberg Surveillance, BMW's plan to cut a fifth of its managers using AI led to a discussion of how fast Chinese carmakers are taking share. Nordvik called it "a very challenging situation for Germany," with defence spending "the only offset." That's another weight on the euro's growth story.

• Nikkei. Hardy noted the Nikkei was "quite strong" on Wednesday even as the yen firmed. A stronger yen from intervention is the main short-term risk for exporters.

• Gold. Hardy watched gold break below $4,200 and sees "a full retreat back into the 4,000 support," with $3,500 the big chart level below that. That ties back to the SNB, which holds a lot of gold.

• VIX vs FX volatility. The VIX was around 15.76 on Wednesday, while FX volatility was picking up. Stock markets are calmer than currency markets.

What changed

Since Monday, the main source of stress has moved from Tokyo to Paris. Japan's warnings pushed dollar-yen from close to 160 to below 157. The euro then broke to its lowest level since May 2025 as the France-Germany spread jumped from about 110 to 120–125 basis points in three days.

The UK added a new risk: a Prime Minister promising a much bigger state role, with the bill still to come. The Aussie confirmed that a dovish hike doesn't help a high-yielder when the dollar is rising.

And Nordvik gave the clearest framework yet for the dollar's next turn: it comes when someone steps in to stop bond yields rising. Until then, the bond market leads and currencies follow.