Euro: Fiscal contagion fears weigh on single currency – MUFG

MUFG’s Lee Hardman highlights that Euro (EUR) weakness at the start of the week reflects mounting concerns over destabilizing financial conditions in the Euro-zone, triggered by a sharp sell-off in French government bonds. Wider spreads over German Bunds, signs of contagion to Italian bonds and renewed fragmentation risks are undermining the Euro, with year-to-date lows versus the Dollar and Japanese Yen.

Fiscal stress drives Euro weakness

"The euro has continued to weaken at the start of this week driven by intensifying fears over the destabilizing financial conditions in the euro-zone triggered by the sharp sell-off in French government bonds. It has encouraged a broad-based softening of the euro which has fallen to fresh year-to-date lows overnight against the US dollar and yen at 1.1161 and 176.41 respectively."

"The yield spread over German Bunds has blown to just over 140bps which is almost 60bps wider than before the summer. The increasingly rapid sell-off is adding to sense of crisis in the French government bond market."

"The unfavourable developments have triggered fears over the re-emergence of fragmentation risks in the euro-zone that could impede the transmission of monetary policy."

"With no easy way out in the near-term, the euro can weaken further in the near-term, we recommended a short EUR/JPY trade idea in our latest FX Weekly report on top of our existing long USD/SEK trade idea."

"At the same time, market participants are watching closely to see if there further signs of contagion in the region. It was notable at the end of last week that Italian government bonds were also negatively impacted even at the short-end of the curve."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)