Financial Times: Lacklustre European banks poised to drag euro lower

05 November 2019

When large European bank stocks suffer, that is usually bad news for the euro. This year has been no exception — and fears are growing that their uptick in recent months will be short lived. Fears grow that the ECB’s relaunch of its QE programme is also likely to hit the European currency.

Signs of further bank weakness emerged last week after Deutsche Bank’s flagship fixed-income business registered lacklustre results for the third quarter. The performance of Credit Suisse’s investment banking division also clocked up a poor quarter, even though wealthy clients in the asset management business helped offset the weakness.

Martin Enlund, head of global currency strategy at Nordea, said the perceived health of the euro-area banking system had been a useful indicator of where the euro’s exchange rate might be heading, as stock prices tended to reflect underlying lending and economic growth in the region.

“Since late August the eurozone banking system has been viewed more positively, which benefited the euro as a result of equity market inflows into the sector,” Mr Enlund said.

Now these flows could reverse if the collective share price of eurozone banks continues to flounder.

The relaunch of the European Central Bank’s quantitative easing programme could also hurt the euro, leading Nordea to advise clients to sell the currency when it climbs against the dollar.

“We suspect [the start of QE will] bring about a more negative flow environment for the euro than what we have seen recently,” Mr Enlund said.

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