Global FX: Spilled OATs, Payrolls, Risks to carry

FX markets are navigating a shift as US payroll data signals a cooling labor market, prompting USD consolidation rather than a broad sell-off, supported by resilient GDP and consumption metrics. Widening French OAT spreads have introduced new volatility, spilling over into currency markets and challenging the Euro’s stability. This dynamic forces a reassessment of funding strategies; while the carry trade remains attractive, particularly in AUD and NOK, the Swiss Franc’s role as a primary funding currency is increasingly risky due to recent sharp moves. Meanwhile, Sterling maintains relative strength against the Euro, bolstered by solid UK growth and a clearer political outlook. Investors should prioritize pro-cyclical exposure while incorporating defensive hedges against potential further widening in European bond spreads, as the market digests these evolving macro pressures and shifts in funding dynamics.