Concerns about the fate of the largest German lender have captivated investors’ attention of late. EUR has emerged relatively unscathed so far, however, and this seems to be due to several reasons.
1. Investors still seem to view the Deutsche Bank troubles as an isolated incident with limited impact on the Eurozone banks, especially if one looks beyond Italy’s troubled lenders (Figure 1).
2. There is limited evidence that the Deutsche selloff is having a negative impact on German and European economic confidence (Figure 2).
We suspect that EUR is also holding up because of the unwinding of short-EUR hedges by investors trying to flee the Eurozone capital markets. A potential escalation of market concerns could trigger further unwinding of EUR-funded carry trades and support the single currency.
The downside risks for EUR should linger for now, as concerns about Eurozone banks may force the ECB to dig deeper into its monetary easing toolbox. Political uncertainty could also grow as investors’ attention shifts to the constitutional referendum in Italy on 4 December.
That said, EUR’s safe-haven appeal should limit the damage from any renewed selloff and we see EUR/USD at 1.1000 into year end. The European risk-correlated currencies (G10 or not) and GBP, as well as other G10 commodity currencies, may have to bear the brunt of any risk selloff in response to a deteriorating outlook for European banks.
Copyright © 2016 Credit Agricole CIB, eFXnews™
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