Hints of Eurozone Reintegration

The reduction in cross-border financial asset holdings and regional trade across the eurozone are perhaps the most visible scars left from the global financial crisis and subsequent fallout in European sovereign debt markets. Under pressure from national regulators to...

Eurozone deflation risk remains

Market momentum is building behind the global growth slowdown narrative, with last week’s downbeat European Commission forecast report triggering a safe-haven bid. The eurozone, in particular, is caught in the crosshairs with the German and Italian economies buckling...

The Italian Doom Loop

With Rome appearing to square off with Brussels over its contentious budget, BTPs have faced considerable pressure and bank stocks have been hammered. This is the nefarious doom loop: Italian banks own a large chunk of Italian government debt and, given the lack of...

Dollar Funding Shortage set to Continue

The widening of the cross-currency basis (JPY, EUR and GBP, in particular) against the US dollar provides further evidence of a structural dollar-funding shortage, which is set to worsen as the Fed tightens. Although the spread typically widens towards year end, the...

SNB may soon come under pressure

We have previously argued that the Swiss National Bank has become slightly more tolerant of modest currency strength, given that the sheer scale of previous FX intervention has dented the central bank’s appetite for further balance sheet expansion. The top-left chart,...

Harbinger for Polish Slowdown

On the back of signs that Germany and the eurozone are slowing, we highlight the risk of a drawdown in Polish economic growth. Although Poland is ostensibly a domestic demand-driven economy, it is still highly trade dependent (exports + imports are above 100% of GDP)...

Czech koruna: Pausing for Breath

Since we highlighted the potential of CE3 markets in July 2017 in light of the global reflation trend, our preferred trade – short EURCZK – has made a modest 2.8%. Even after this relatively anaemic rally, we believe that the koruna will now take a breather. As a...

Cost of FX Hedging Pushing Yen Higher for Now

One of the strongest performers against the USD lately has been the yen, with USDJPY now probing 15-month lows. One of the main drivers has been the surging cost of FX hedging (assume rolling 1 year FX forwards). The top-left chart shows the pick-up for a yen investor...

Vulnerabilities in Europe

Sentiment in Europe has soared to its highest level since 2001. However, in Europe as elsewhere, such lofty sentiment should be taken as a warning for markets, not a green light. As we can see from the top-left chart, previous peaks in economic sentiment have...