EUR: Outlook complicates over European banks concerns - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the euro has continued to strengthen modestly boosted alongside the yen, although to a lesser extent, by more risk-averse trading conditions.

Key Quotes

“The relative safe haven appeal of the euro is supported by the euro-zone’s sizeable current account surplus at around 3% of GDP. However, the outlook for the euro is complicated by the increasing likelihood that the ECB will implement more aggressive easing when it meets in March in response to current negative developments which are increasing downside risks to their economic outlook.

The broader market focus is also intensifying upon the health of the European banking sector. The STOXX Europe 600 Banks equity index has declined by almost 40% since peaking in July and is moving closer to the lows from the middle of 2012 during the peak of the euro-zone sovereign debt crisis. It is notable that sovereign yield spreads between peripheral euro-zone countries and German bonds have started to re-widen, although they still remain significantly narrower than levels reached in 2012.

The negative developments in the European banking sector are increasing downside risks for the outlook or economic growth in the euro-zone if it leads to a tightening of credit conditions. In recent years European banks have been easing credit conditions providing a more supportive environment for the economic recovery in the euro-zone. There is already tentative evidence that the pace of economic recovery is the euro-zone is beginning to ease in the near-term. It casts some doubt over the sustainability of the euro’s outperformance in more risk-averse trading conditions.”