(from our Tactical of 13th September)
Drivers of the euro are showing support. When the ECB in March of this year shifted its emphasis from the rate channel to the credit channel for the transmission of monetary policy, this took a weight off the euro. Since that day, the euro is virtually unchanged vs the USD, and has not been much lower at any time in between. The ECB backed off from negative rates at the March meeting – cutting less than the market expected – as it began to appreciate the damaging effect to banks’ net interest margins.
At the same time, the eurozone is running a large and growing current account surplus. Generally this is a very potent supportive factor for currencies, but in 2014-15 it was not in the eurozone as domestic banks were lending abroad. We can see this in the bottom chart, where banks’ external assets (black line) were growing faster than their total assets (red line) during this period. Since late 2015, eurozone banks have been struggling, and lending less abroad (as well as repatriating loans from abroad). Less recycling of the giant surplus and repatriation of loans will
Source: Macrobond, Bloomberg and Variant Perception
