EUR is hit hard as banking fears spread to Europe
Lee Hardman
Senior Currency Analyst
Global Markets Division for EMEA
T: +44 (0)20 7577 1968
MUFG Bank, Ltd.
A member of MUFG, a global financial group
EUR: US banking fears spread to Europe as Credit Suisse taps SNB for support
The euro has staged a modest rebound during the Asian trading session following yesterday’s sharp sell-off on the back of heightened fears over the health of European banks. The main trigger for yesterday’s sell-off was the ongoing loss of confidence in Credit Suisse that saw its share price plunge by just over 30%. The sell-off accelerated after the chairman of Saudi National Bank, which became the biggest shareholder in Credit Suisse late last year, stated that the bank would not boost its share holding past the current level of just under 10%. The sharp plunge in the share price of Credit Suisse spilled over into weakness in other European banks. The STOXX Europe 600 Banks equity index fell by almost 7% yesterday and extended its decline to around 15% from the high towards the end of last week. The loss of confidence in banks was initially triggered by the collapse of Silicon Valley Bank that has resulted in a loss of confidence in other US regional banks and has now spread as well to a loss of confidence in European Banks. The contagion has resulted in a pick-up in volatility in the foreign exchange market. EUR/USD initially climbed to a high yesterday of 1.0760 as market participants’ focus was on fears over US regional banks and the sharp dovish repricing of Fed rate hike expectations. But it has since dropped back sharply yesterday and hit a year to date low of 1.0516 as fears over the health of Credit Suisse and European banks started to dominate price action. Credit Suisse is much bigger than Silicon Valley Bank and poses a greater systemic risk to the banking system.
The worrying developments have prompted Credit Suisse and the Swiss authorities to take timely and decisive action in an attempt to regain investor confidence. It was announced overnight that Credit Suisse had taken the decision to “to pre-emptively strengthen its liquidity” by borrowing funds totalling up CHF50 billion from the SNB under a loan facility and short-term liquidity facility that are fully collateralized by high quality assets. In addition, Credit Suisse stated that it plans to make a cash tender offer 10 US dollar-denominated senior debt securities worth up to USD2.5 billion and four euro-denominated senior debt securities worth up to EUR500 million. It is the second debt repurchase in just the past six months after it offered to buy back about USD3 billion of debt in October of last year. The developments will help to ease more immediate fears over a liquidity crisis at Credit Suisse and have already provided some initial relief for the euro as it has moved back up above the 1.0600-level against the US dollar.
It provides a challenging backdrop for the ECB ahead of today’s policy meeting. We had held the view that the ECB would follow through on guidance from their last meeting and deliver another larger 50 bp hike today, but are now less confident in light of the uncertainty created by the recent loss of confidence in European banks. President Lagarde did state that it was likely only exceptional circumstances would prevent a larger 50bps hike being delivered. With no comments to go on from ECB officials since late last week, it makes it hard to judge whether the ECB will deviate from their plans for another larger 50bps hike. A compromise solution between the doves and hawks could be to still raise rates despite European banking concerns but to deliver a smaller 25bps hike. The European rate market is currently pricing in around 37bp of hikes ahead of today’s policy meeting. The fundamental case for further rate hikes remains in place at the current juncture. The updated ECB staff forecasts for core inflation and GDP are both expected to be revised higher today. Even if the ECB does follow through and deliver a larger 50bp hike today, the forward rate guidance is likely to be more cautious in response to recent banking concerns. We would expect the ECB to signal that further rate hikes will be data dependent going forward and made on a meeting by meeting basis rather than committing strongly to another larger 50bp hike at the next meeting in May. While the ECB’s rate decision has the potential to have a significant impact on euro performance today, we expect it to be mainly driven by European bank equity performance in the coming days or even weeks. Please find further information in our latest Global Markets Monthly (click here).
European bank equities giving back year to date gains
Source: Bloomberg, Macrobond & MUFG GMR
KEY RELEASES AND EVENTS
|
Country |
GMT |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
IT |
09:00 |
Italian HICP (YoY) |
Feb |
9.9% |
10.7% |
! |
|
US |
12:30 |
Building Permits |
Feb |
1.340M |
1.339M |
!!! |
|
US |
12:30 |
Housing Starts (MoM) |
Feb |
-- |
-4.5% |
!! |
|
US |
12:30 |
Initial Jobless Claims |
-- |
205K |
211K |
!!! |
|
EC |
13:15 |
Deposit Facility Rate |
Mar |
3.00% |
2.50% |
!!! |
|
EC |
13:45 |
ECB Press Conference |
-- |
-- |
-- |
!!! |
