Euro traders await more signs of Turkey pain with banks at risk

By BLOOMBERG

LONDON • There is little sign that the euro is about to turn around its rough patch against the dollar as concerns over the exposure of the region’s banks to Turkey ratchet up and bund yields slide back toward the lower end of their recent range.

The common currency broke below support at US$1.1500 (RM4.70) last Friday to touch its lowest point since July last year, following a report that the European Central Bank (ECB) sees UniCredit SpA as particularly vulnerable to Turkey’s market woes.

While there isn’t a large buildup of long positions to be squeezed out, a change in fortunes may be unlikely until bund yields begin to rise more meaningfully, according to Societe Generale SA.

“ECB concerns grow over European Union banks’ Turkey exposure has provided the catalyst for euro/dollar to fall out of the bottom of its three-month 1.1500-1.1850 range,” strategist Kit Juckes wrote in a note to clients.

“We would still rather own Norwegian krone and Swedish krona than euro, or pound.”

The euro has the potential to drop further if there is more evidence of spillover from the rout in the lira to the euro-area banking sector. Credit Agricole SA strategist Valentin Marinov sees a break of US$1.14 potentially “opening the way” to a test of US$1.1360-US$1.1370.

Traders face euro-area second- quarter gross domestic product data on Aug 14, as well as industrial production data for June, while Germany’s ZEW survey is published on the same day.

The final July Consumer Price Index reading for the region is scheduled for Aug 17.

A host of economic numbers — including US retail sales, leading indicators, consumer sentiment — are due this week, which could also dominate proceedings for euro-dollar.

The euro slid 0.9% to US$1.1429 as of 4:02pm in London last Friday, on course for its third consecutive weekly decline. Three-month risk reversals on the pair show traders are the most bearish since April 2017. German 10-year yields fell as much as five basis points to 0.32%, the lowest level since July 20.

The situation in Turkey has the potential to weigh further on the euro “if the market starts to suspect that there is a significant exposure to Turkey among euro-zone firms”, said Rabobank International strategist Jane Foley.

Investors will be keeping a keen eye out for further media reports such as the one published in the Financial Times, or evidence in banks’ quarterly earnings, she said.