Institutionals say EUR/USD to Remain Supported Despite Deutsche Bank Saga

Stay bullish on the Euro argue analysts, from JP Morgan, Credit Agricole, Morgan Stanley and Societe Generale.

The Euro came under selling pressure as investors realized that Deutsche Bank's lower settlement deal with the U.S. Department of Justice has not been confirmed.

There was a media report on Friday 30th September that said they reached an agreement to lower the penalty to $5.4 billion from $14 billion and while talks are underway investors need a deal to be official before they are willing to put DB behind them.

"The problem is a lower number has now been thrown out so if the actual settlement is higher and closer to $10 billion, the euro could still be punished as a result," notes Kathy Lien at BK Asset Management.

A good portion of the institutional analyst community maintain a bullish view of the Euro, regardless of fears Deutsche Bank’s crisis could spill over into a broader Eurozone banking crisis.

In a recent note J P Morgan said that the Deutsche Bank crisis was unlikely to heavily influence the trajectory for the Euro since it was being supported by years of liquidity and buffering from the European Central Bank (ECB).

Indeed, Morgan Stanley sees Euro gains as even more likely now due to Deutsche Bank’s travails since Eurozone banks are now more likely to sell their risky foreign assets and repatriate their euros.

“We stick to the long EURUSD position in our portfolio to express our bearish USD view. We think that worries about the European banking sector are actually a bullish sign for the currency as it may lead to banks selling off foreign assets and bringing the money back home,” said Morgan Stanley a note to clients provided to us by institutional research providers eFXNews.

The euro is likely to be supported primarily by the view that there is now even less chance the ECB will use more stimulus to activate growth in the Eurozone.

With Manufacturing and Services PMI data as the main events for the Euro this week, they are likely to back up the region’s current modest growth story and this will lessen not raise bets on the ECB increasing stimulus.

The banking crisis also limits how much the ECB can do, since any move to lower rates any further, will lead to an even narrower margin of profitability for Eurozone banks’ lending on to customers in the real economy, as they will be unable to charge much interest.

“Stabilising ECB rate expectations have been keeping the single currency broadly stable of late. Given an empty calendar when it comes to market-moving data releases this is unlikely to change this week,” say Credit Agricole.

“If anything there may be some focus on September PMI readings, which are likely to confirm moderately expanding business activity.

“However, considering it will be final readings, there is only limited surprise potential. In terms of speeches, ECB Governing Council Knot will be in focus.

He is unlikely to make a case of changing monetary policy expectations.

“This, in turn, should leave the single currency driven by external factors such as global risk sentiment and Fed rate expectations,” added the French lender.

An analysis of different bond yields also suggests the euro is likely to go sideways or even higher.

Societe General point to how stubbornly US 10 year bond yields remain below 1.6% despite ongoing talk of a December rate hike.

“After another frustrating week, when, despite OPEC agreeing to production cuts and Fed officials working hard to point the market towards a December hike, 10y nominal US yields are still below 1.6%, and it’s hard to get excited about shorting the Euro.,” they said in a recent note.

They see an even greater chance of upside for the euro versus the pound and the yen from a pure yield comparison since both these currencies are unlikely to see higher yields, whereas the US may if the Fed make a surprise move.

“Maybe we’re just in for a long period of going sideways. But I have two more sources of concern, which may argue for Euro longs, against GBP* now and against the yen before long. EUR/JPY is attractive because while USD/JPY is equally sensitive to 10y real yield moves, there’s less upside risk to 10y JGB yields, particularly adjusted for inflation, and the Fed is less sensitive to USD/JPY than EUR/USD, given their relative importance in the TWI baskets. “

As such reasons to buy the euro remain and explain, to an extent the only modest reaction of the currency to the Deutsche Bank  crisis last week.