Synopsis:

Credit Agricole highlights that many of the negative factors related to the upcoming French and UK elections are already priced into EUR/GBP. The spread between the UK and French 5Y sovereign CDS indicates significant political risk in France, pushing relative sovereign credit risk to its lowest level since mid-2022.

Key Points:

1. Current Pricing Reflects Political Risks:

   • Sovereign CDS Spread: The recent political risks in France have significantly widened the country's CDS spread, affecting the relative sovereign credit risk.
   • Historical Context: Similar instances in 2022, 2017, and 2014 saw significant impacts on EUR/GBP due to redenomination risks and the Eurozone sovereign debt crisis.

2. Impact on EUR/GBP:

   • Historical Precedents: In mid-2022, EUR/GBP hit 0.82 during the French general election before rebounding sharply due to the UK mini-budget crisis.
   • Current Scenario: Credit Agricole doubts that the relative sovereign CDS spread will dip significantly further, as the extreme negative spreads seen in previous years were driven by redenomination risks and broader Eurozone crises.

3. French Credit Risks:

   • Fiscal Concerns: The latest increase in French credit risks stems from fears about the country's creditworthiness due to aggressive fiscal spending programs proposed by populist parties ahead of the general elections.
   • Redenomination Risks: Credit Agricole does not expect redenomination risks to resurface, which historically have had a substantial negative impact on French assets and EUR/GBP.

Conclusion:

Credit Agricole argues that many of the negative factors related to the French and UK elections are already reflected in the EUR/GBP price. While political risks have increased, the likelihood of further significant dips in the relative sovereign CDS spread is low. They do not anticipate the resurgence of redenomination risks, suggesting a more stable outlook for EUR/GBP despite the current political uncertainties.