Newsletter · 2026-10-05 · Ashutosh Agarwal

France's Bond Rout Turns the Euro Into a Funding Currency - G10 FX & The Carry Trade - Week of October 5, 2026

G10 FX and carry-trade synthesis for the week of October 5, 2026. A five-sigma jump in the Swiss franc, France-Germany spreads at 149-160 basis points and a new 2026 low of 1.1215 in the euro have J.P. Morgan recommending the euro rather than the franc as the funding currency for carry trades, while sterling looks like Europe's relative winner, State Street sees a top in dollar-yen, and the Mexican peso carry trade unwinds.

G10 FX & The Carry Trade

Week of October 5, 2026: France's Bond Rout Turns the Euro Into a Funding Currency

Last Thursday, the Swiss franc did something it almost never does. It jumped.

EUR/CHF fell from roughly 0.9460 to 0.9325 in a single session, according to Saxo's John Hardy. That means each euro bought noticeably fewer francs. In plain numbers that's a move of less than 1.5%. That doesn't sound like much. But J.P. Morgan's co-head of FX strategy, Meera Chandan, said it was "a pretty punchy 5-sigma move" for a pair that normally barely moves. Statistically, a day like that should be extremely rare.

The cause was in Paris. The extra interest France pays to borrow for 10 years compared with Germany blew out to somewhere between 149 and 160 basis points last week, depending on the hour and who was quoting it. (A basis point is one-hundredth of a percentage point.) That's the same territory as the worst days of the 2011–12 euro crisis.

The result is the big new idea of the week: J.P. Morgan now thinks investors should start borrowing in euros to fund their carry trades instead of in francs. A year ago that would have sounded odd. Here's why it doesn't any more.

TL;DR

French spreads hit euro-crisis levels. The France-Germany 10-year spread reached 149bp (Saxo), ended budget day at 140bp (Nomura), and was quoted near 160bp by MUFG. Marc Chandler notes it's "usually about 80."
The franc is the shock absorber. EUR/CHF fell from 0.9460 to 0.9325 in a day. J.P. Morgan says the franc is now a risky currency to borrow in and suggests rotating to the euro as the funder.
The euro hit a new low for the year. EUR/USD printed 1.1215 on Thursday (Saxo). Options traders are building longer-dated bets against the euro, says MUFG.
The dollar is strong but stretched. The dollar index is up about 3.6% since mid-September. Chandler sees a likely top near 102.85. Brent Donnelly says the dollar is getting "quite overextended" against everything except the euro.
Sterling may be the winner in Europe. J.P. Morgan thinks sterling can gain against the euro as talk of a closer UK-EU relationship chips away at a 7–12% "Brexit discount" in the pound. But 30-year gilts hit 6%, the highest since 1998.
The yen top may be in. State Street's global head of FX, Chris Pizzotti, sees 165 as the top of the range for dollar-yen and a path to below 150 by year-end, with the US now actively helping Japan.
The emerging-market carry trade is unwinding. The Mexican peso has given back all of its gains for the year. Dollar-peso is up about 6% in a few weeks.

What's new

1. The franc's five-sigma day, and why it matters for every carry trade

All year, the most reliable way to make money in currencies has been the carry trade. You borrow in a currency with low interest rates, like the yen or the franc. You put the money into one with high interest rates, like the Australian dollar, Norwegian krone or Mexican peso. You pocket the difference, as long as the exchange rate doesn't move against you.

After Japan started warning it would intervene to support the yen, the franc became the favourite currency to borrow. The Swiss National Bank had rates at 0% and looked relaxed about it. That's what blew up last week.

On At Any Rate, "Global FX: Spilled OATs, Payrolls, Risks to carry" (Oct 2), Chandan explained the problem:

"The primary generator of returns in FX all year has been carry. And so if Swiss is a funder and delivers that kind of move, you know, that obviously does can morph into something quite relevant."

Her colleague James Mulligan said EUR/CHF "still kind of screened rich" against where French spreads say it should be. In other words, the franc could strengthen further. Chandan's verdict on borrowing francs:

"It's just going to be very hard for investors to hold on to Swiss shorts in any meaningful way, just given... the risks can be quite asymmetric around it."

So what should replace it? Chandan's answer is the euro itself. If the European Central Bank can't keep raising rates because French yields are spiralling, the euro loses its interest-rate support. "It's better almost to use euro as a funder," she said. J.P. Morgan still likes the Australian dollar and Norwegian krone as the high-yielding side of the trade.

Is this the start of a big carry crash? J.P. Morgan's Patrick Locke, who tracks investor positioning, thinks not. The yen has "returned pretty meaningfully long" on his measures, so there's no crowd of yen borrowers left to panic. Franc short positions were the last big pocket, and "it looks like some of that got cleansed yesterday." The firm's options data showed "very large multi-sigma put demand in Euro Swiss." His guess: a "more of a contained move, more so than kind of like evolving into a larger, broader carry trade unwind."

On Saxo Market Call, "Beware the steepening or what's the message?" (Oct 2), John Hardy gave the same story in simpler terms. The case for being short the franc was: "it yields nothing. And, you know, we can leverage that short up." When European interest rates fell sharply, that advantage shrank. On top of that came the old instinct to hide in Swiss francs during a euro scare. His conclusion: the plunge to 0.9325 "kind of put a cap on euro Swiss for now... certainly until these French spreads and debt spreads across Europe look very differently."

MUFG agreed on The MUFG Global Markets Podcast (Oct 2): the franc was "the main beneficiary" of the euro's slide, "as always... the kind of regional safe haven currency in Europe."

Why it matters for a book: Last Thursday this newsletter noted that a dovish SNB made the franc an attractive currency to borrow in. One week later, the two biggest bank FX teams on these podcasts are saying the opposite. Anyone funding carry trades in francs is now carrying a risk that just showed it can move five standard deviations in a day.

2. France: crisis levels, but is the move overdone?

Every macro podcast last week talked about France. The numbers:

10-year France-Germany spread: 149bp at the peak (Hardy, Saxo), 140bp at the close on budget day (Josie Anderson, Nomura), "almost 160" (MUFG), and briefly above 1.6% on Friday morning per Nik Bhatia on The Bitcoin Layer.
French 10-year yield: "closer to 5 percent" (MUFG).
Italy: widened too, to 120–124bp over Germany (Nomura, Saxo). Hardy said it "was well below 100 basis points just a handful of days ago."
Year to date: Marc Chandler on The KE Report (Oct 2) said French 10-year yields are up 130bp this year, Italy 105bp, the US 110bp and Germany just 60bp.

The budget didn't help. Prime Minister Sébastien Lecornu's government presented its 2027 budget on Thursday, Oct 1. Nomura's Anderson laid it out on Nomura – The Week Ahead (Oct 2): savings of €54 billion, about 60% from spending cuts on pensions, public sector pay and sick pay, taking the deficit from 5.4% of GDP to 5%. Without action, she said, the deficit would reach 6.5% next year. MUFG pointed out the 5% target is almost the same as this year's, which France missed because growth was weak. And the government has no majority in parliament to pass it.

Hardy summed up the market's verdict: "Too little too late is the seeming read on that."

The case that it's overdone. J.P. Morgan's rates team, on At Any Rate, "Global Rates: Mixed themes in European rates" (Oct 2), pushed back. Aditya Chaudhia said the spread has widened 75–80bp since early August, but "not much fundamentally has changed on politics or fiscal." The real driver, he said, was investors being forced to sell leveraged bets: "ongoing large liquidations of overweight carry exposures." On J.P. Morgan's model of each country's finances, France is now "more than 40 basis points too wide." He added that Marine Le Pen is "giving a sense that she might be willing to approve the budget, even if it's not a great budget."

On The Macro Trading Floor, "Macro Blowups Everywhere - What Now?" (Oct 2), Alfonso Peccatiello of The Macro Compass made the political argument. Le Pen has to win over centrist voters to beat the far-left Jean-Luc Mélenchon in April. To do that, she needs a credible plan for the public finances. For the first time, he said, she floated a "golden rule" in the constitution that would ban any future government from running a deficit above 3%. The test is how her party votes on the budget this month: "if she votes for the fiscal tightening, then the market knows that she's serious about it."

But Peccatiello isn't buying French bonds yet. Le Pen made her comments, "and the market does not care a tiny bit. And even today, we're wider in spreads... good news, bad price action."

Will the ECB step in? The ECB has a tool called the Transmission Protection Instrument, or TPI, which lets it buy a country's bonds if their yields rise for reasons it considers unjustified. It has never been used. Most voices think it won't be used soon:

Nomura's Anderson: "most people in the market are saying that they don't expect the ECB to use it because this is being driven by something that is... going on in France, not necessarily just disorderly markets."
Brent Donnelly (Spectra Markets), on The Macro Trading Floor: TPI is designed for when "a lot of different countries are blowing up at the same time... right now is that really it's only France." His view: "it has to get worse before it can get better."
Hardy (Saxo) noted TPI can only be used if a country's debt is sustainable, which he argues France's is not.
Nik Bhatia on The Bitcoin Layer (Oct 2) put a number on it. He expects the ECB to step in "closer to, let's say, the 1.75% to 2% levels" on the spread. That's a commentator's estimate, not a bank forecast.

Donnelly offered the historical marker: at the worst of 2011–12, "France got to 185 and did not stay there for very long."

3. The euro: a new low, and traders are betting it goes lower

The euro fell to 1.1215 against the dollar on Thursday, Hardy said, its lowest of the year. CNBC's Squawk Box Europe had it at about 1.1250, "its lowest level since May 2025."

Donnelly made a striking point about how tightly the currency is now tied to French bonds: "Eurodollar and Euro-Suisse have both been trading pretty much tick for tick off French spreads now." When US core inflation data came out, he said, "Euro went up for about 30 seconds and then it crashed because of French spreads." His conclusion: "even more important than U.S. data right now for the dollar is the performance of global bonds and especially French bonds."

Options traders are settling in for a longer fall. MUFG's Abdul Ahad Lockhart tracks options trades reported to the US trade repository (DTCC). He found demand for euro "puts" (bets that the euro falls) more than one standard deviation above normal across nearly every time horizon. More telling is the shift in timing. Since mid-September, the share of trades expiring within a week has dropped from about 45% to 20%. Trades expiring in one to three months have risen to about 60%. In his words:

"Markets appear increasingly willing to price and sustain French political risk premia ahead of the April 2027 presidential election."

He also found that the link between French bond spreads and EUR/USD "has accelerated," meaning the currency now reacts more to each widening than it did earlier in the year.

The ECB is caught. Inflation in the euro area rose to 3.8% in September (Nomura, MUFG). Earlier in the week, NAB's Morning Call said markets were pricing 57bp of further ECB hikes. But then the bond turmoil hit. Hardy said Germany's 2-year yield fell 14bp in one day and briefly traded below 3%, down from about 3.35% at its peak. Markets went from pricing "three plus hikes through March of next year" to "maybe two or just less than two hikes."

MUFG said ECB President Christine Lagarde signalled that higher long-term borrowing costs "will put more of a dampener on growth and inflation in Europe," which "implies less need for them to hike rates as much." MUFG also thinks the ECB may have to slow the pace at which it is shrinking its bond holdings (quantitative tightening). Nomura still expects hikes in December and March, because "ultimately, their primary mandate is inflation."

That is exactly the bind J.P. Morgan is betting on: an ECB that can't hike as much makes the euro a cheaper currency to borrow.

How low? On Macro Voices #552 (Oct 1), Patrick Ceresna of Big Picture Trading said that with the euro below the 1.13 level, it "could head down to 110 or even 108" (1.10 or 1.08). He also pointed to Europe's dependence on imported energy, which hurts it more than the US while oil is high.

J.P. Morgan is more measured against the dollar. Chandan said the euro is "a bit harder" to short against the dollar "because the Fed's gotten fully priced." She prefers selling the euro against other currencies: the franc, krone, Swedish krona, sterling or Australian dollar.

4. The dollar: strong, but nearing a top?

The dollar has had a big run. Chandler said the dollar index (DXY, which measures the dollar against six major currencies) has "gone basically ballistic," rising about 3.6% since just before the mid-September Fed meeting to around 101.68, a new high for the year.

But he is watching for a turn. He pointed to the halfway mark between January 2025's high above 110 and this January's low of about 95.50: "I'd be looking at about 102.85... as we approach that, the risk reward to be long dollars... changes. So I'm looking for a top. I haven't seen it yet."

His reasons: momentum indicators show the dollar is "very overbought." And markets are pricing more Fed hikes than the Fed itself expects. The Fed's own projections show one more hike; markets have been "flirting with more of a normal business cycle with four or five rate hikes in it." He expects that gap to close "a little bit more in the Fed's favor than the market's favor."

Chandler also made an interesting point about what moves currencies. Textbooks say it's the gap between two countries' interest rates. In his experience, for the euro, yen and sterling, "US interest rates are more important than their interest rates or than the interest rate differential." The exception is the Canadian dollar, which has strengthened only twice in three and a half weeks, each time by less than 0.1%.

Friday's jobs report took some heat out. J.P. Morgan's Patrick Locke called the September jobs report "generally a pretty soft print": job gains missed, prior months were revised down by 60,000, unemployment rose and wage growth stayed weak. MUFG said it backs their view that the Fed holds in October and hikes in December. Nomura's US team, citing New York Fed President John Williams and Vice Chair Philip Jefferson, made the same call.

J.P. Morgan's verdict: "consolidation for the USD more so than a sell-off." The dollar "does maintain its yield supremacy overall."

Donnelly's split view. On The Macro Trading Floor, he said the dollar is "kind of getting quite overextended against things like Canada and Mexico." He's still bearish on the euro. But he is "much less bullish dollar against almost anything else," and would be "more bearish dollar yen, dollar CAD, and dollar max [peso]."

5. The yen: the US is now part of the story

Dollar-yen was quieter last week after Japan's warnings knocked it off 160 the week before. The most detailed view came from Chris Pizzotti, Global Head of FX Sales and Trading at State Street, on Street Signals, "Bytes, Bonds and the Yen: The Big Picture In FX" (Oct 1).

He admitted that markets have heard about yen intervention for a decade, and dollar-yen usually drifts higher again afterwards. What's different now, he said, is Washington:

"What's really different in my view this time around is the US involvement and how outspoken the Fed has been about the level of dollar-yen and, you know, wanting to drive dollar-yen lower. At the same time, you're seeing the Bank of Japan raise rates and likely to continue to raise rates."

He walked through the timeline: rate checks in January (when officials call banks to ask for prices, a warning shot), then a joint US-Japan intervention in July. His levels:

165 as "top of the range for me moving forward."
"Significant conversation and rhetoric" from Japan and the US if dollar-yen gets back above 160, "even overnight."
A move "below 150 even by the end of this year," then "back down towards 140" over time.

The trigger he's watching: any fall in US interest-rate expectations while the Bank of Japan keeps hiking. Friday's soft jobs report was a small step in that direction.

Pizzotti also said the yen's weakness has been "a pretty Japan idiosyncratic story," not broad dollar strength. That fits Donnelly's bearish dollar-yen view.

A complication for yen bulls. Hardy noted that euro-yen "should trade lower" on European stress, but hasn't fallen much. His explanation: "Japan has its only, its own set of concerns" on government debt, "so it's just not as easy to just reflexively sell euro yen on European risk like it was in the old days." He called it "a reluctant trender."

J.P. Morgan, though, still likes short EUR/JPY as a hedge: "usually you don't really have this kind of move in spreads without a larger move in these crosses."

6. Sterling: the quiet outperformer, with a gilt problem

Sterling got a surprisingly upbeat review from J.P. Morgan's James Mulligan on At Any Rate. He called it "probably most interesting for me at the moment." His reasons:

A "pretty solid beat on UK GDP this week."
Prime Minister Andy Burnham "bringing up the Brexit issue at the Labour Party conference." J.P. Morgan estimates a Brexit discount of 7 to 12% in the pound's trade-weighted value. A UK-EU summit is coming in November.
Burnham and Chancellor John Healey "sounded very controlled, very measured at the conference."
EUR/GBP is "pretty much in line with fair value," after trading "2 pence cheap only a couple of months ago."

"That's not going to stop the market flirting with the idea that you can chip away at this Brexit risk premium in the currency... So I think you can see sterling kick on here, particularly versus Euro."

He also said relative political risk "is crystallizing" in Europe while UK growth "has been really quite solid."

Hardy added detail on Saxo: Burnham said "we shouldn't rule out a second Brexit referendum." Nigel Farage called that "a gift to Reform." Hardy isn't so sure, and thinks a customs union or something like it "has certainly got to be in the card somewhere for the UK here."

The risk: the gilt market. On CNBC's Squawk Box Europe Express (Oct 1), the presenters noted the 30-year gilt yield hit 6% on Thursday, "its highest level since 1998," making the UK "the first G7 economy to pay a rate that high since the euro crisis." UK bank shares also fell after Sky News reported the heads of big lenders had been called to meet Healey ahead of next month's Budget, amid talk of new bank taxes. Hardy said UK long yields touched "new cycle and multi-decade highs" but then came back into their range, "a bit of a relief on any kind of worry about UK debt dynamics."

Chandler put the UK in context: UK 10-year yields are up about 90bp this year, less than France (130bp) or the US (110bp).

7. Carry outside the G10: the peso unwinds

The stress in carry trades showed up most clearly in emerging markets.

MUFG said rising FX volatility "triggered an unwind of some of the kind of popular carry trades in the emerging market space. The Mexican peso has kind of stood out," with "a forced liquidation of those elevated peso positions."

Pizzotti gave the numbers. The peso's gains for the year against the dollar "has been completely unwound," with "an almost 6% move higher in dollar Mex." Dollar-Colombian peso "is almost 10% off the lows," after the Colombian peso had been up 17–18% for the year. His key point is about the reward for the risk: the Mexico-US interest rate gap is "only about 250 basis points now, which is near historical, if not historical lows... is it worth the extra risk now, especially when equities are at all-time highs?"

Donnelly thinks the peso sell-off is getting late. Options traders are now paying up for protection against an even weaker peso, which to him signals people "blown up... selling top side and now you have to cover." He puts it in "the seventh inning" out of nine and is "on high alert" for a chance to bet on the peso recovering.

The Aussie kept sliding. NAB's Morning Call said AUD/USD was at 0.6948, down from 0.72 on Sept 8, after softer Australian inflation and a less hawkish Reserve Bank cut the odds of back-to-back hikes. J.P. Morgan still prefers the Aussie and Norwegian krone as high-yielders. Mulligan sees fair value for EUR/NOK down at 10.70, which leaves room for the krone to gain.

The debate

Bear case for the euro (well supported):

French spreads at 140–160bp, the budget seen as "too little too late," and an April 2027 election that could be Le Pen vs. Mélenchon (Hardy, MUFG, Peccatiello).
The ECB is boxed in. Inflation is 3.8%, but bond stress means fewer hikes, which weakens the euro's support (MUFG, Saxo).
Options traders are building one-to-three-month bets against the euro (MUFG).
Targets: 1.10–1.08 (Ceresna); medium-term bearish (Donnelly).

Case against piling in:

J.P. Morgan's rates team thinks France is 40bp+ too wide, driven by forced selling, not new news. Le Pen's golden-rule talk and a possible yes vote on the budget could turn things.
Euro positioning already "screens reasonably short" (Locke).
The dollar side looks stretched. Chandler sees a top near 102.85 on the DXY. Donnelly is less bullish on the dollar against everything but the euro.

Bull case for the yen: US support for intervention plus Bank of Japan hikes (Pizzotti), and a softer US jobs market. The pushback: Japan's own debt worries keep euro-yen from falling as you'd expect (Hardy).

Honest read: The podcasts agree the euro is now the weak link in the G10, especially against the franc, sterling and the Nordic currencies. They disagree on whether the dollar keeps climbing. Nobody argued this week for EUR/USD back at 1.20. The view that the dollar is near a top is mostly a view on other currencies (yen, peso, Canadian dollar) catching up, not the euro.

Trades in play

Short EUR/CHF and short EUR/JPY as hedges. J.P. Morgan's suggestion for anyone holding carry trades: "it actually makes sense to have a bit of Euro-Swiss, bit of Euro-Yen." Hardy thinks the plunge to 0.9325 has capped EUR/CHF while French spreads stay wide.
Fund carry in euros, not francs. Keep the high-yield side in the Australian dollar and Norwegian krone (J.P. Morgan). EUR/NOK fair value is 10.70.
Short EUR/GBP. Mulligan: "you can see sterling kick on here, particularly versus Euro." The risk is a gilt scare before the Budget, with 30-year yields at 6%.
Short USD/JPY. Pizzotti sees 165 as the top and below 150 by year-end. Donnelly is also bearish dollar-yen. Watch for loud warnings from Tokyo and Washington above 160.
Fading the dollar against the peso and Canadian dollar, carefully. Donnelly is "on high alert," not yet short dollar-peso, and calls it "the seventh inning."
Bonds as the leading indicator. Donnelly: watch French spreads before US data. UBS's head of European rates strategy told Squawk Box Europe he closed his short in French bonds versus Germany and opened a short in Italian bonds versus German Bunds, arguing "the safest assets are still the Bund."

Read-throughs

EUR/CHF and Swiss exporters. A franc that jumps 1.5% in a day is a headwind for exporters like Nestlé, Roche, Novartis, Swatch, Richemont and ABB, just as last week's weak franc looked like relief.
EUR/JPY. J.P. Morgan sees room for this cross to fall. Hardy sees it moving reluctantly because Japan has its own debt questions.
Bunds vs. the rest. German 2-year yields fell 14bp in a day as money ran to safety (Hardy). French and Italian spreads widened at the same time. Italy is the next place traders are looking.
Gilts. 30-year yields at 6%, the highest since 1998, with a Budget coming and talk of bank taxes.
European stocks. CNBC said the Stoxx 600 fell about 1.9% in the week and French stocks about 3%, before a bounce on Friday as yields fell.
Gold. On Macro Voices, Ceresna said gold gave up the $4,200 area and could retest $4,000. That matters for the SNB, which holds a lot of gold.
Emerging markets. The peso and Colombian peso unwind shows what happens to carry trades when volatility wakes up.

What changed

Last Thursday, the story was France pulling the euro down and a dovish SNB weakening the franc. This week the franc reversed hard. EUR/CHF fell from about 0.9460 to 0.9325 in one session, and the borrow-in-francs trade suddenly looked dangerous.

The French spread went from 120–125bp to as wide as 149–160bp. The euro broke below last week's 1.1325 low to 1.1215. And the Fed's October hike largely came off the table after soft inflation and jobs data.

The biggest change in thinking: J.P. Morgan now wants clients to fund carry trades in the euro, the currency at the centre of the storm, rather than the franc.