EURUSD has traded at a discount relative to real rate and yield differentials due to the EMU’s financial sector weakness and uncertainties about the impact of Brexit on European economies.
Real yield differentials against GBP and the USD point in favour of the EUR and with domestic balance sheets weak, there will be no export of long-term capital sufficient to offset the Eurozone's current account surpluses without an FX adjustment.
Over recent weeks, the EUR has traded increasingly tight to the performance of the EMU’s banking sector share prices indices. Italian bank shares have rebounded recently, increasing the chance of a EUR rally.
Copyright © 2016 Morgan Stanley, eFXnewsOriginal Article
