fxs_header_sponsor_anchor

News

Eurozone break-up: How much would the euro drop? – Deutsche Bank

Research Team at Deutsche Bank analyses that how much the euro and its legacy currencies would weaken in the event of a Eurozone break-up.

Key Quotes

“Under conservative assumptions we calculate that EUR/USD would fall by 25-30% to  80-75cents just before break-up. Some legacy currencies could fall by an additional 40% after the event.”

“The defining event of a Eurozone break-up would be a capping or outright suspension of cross-border Target 2 payments. However, the ECB would be unlikely to do this without political validation.”

“Four things would drive the euro and its legacy currencies in the event of a break-up. First, the need to correct existing valuation misalignments. We find these to be small. Second, large-scale capital flight as the euro loses its reserve status. Third, a large negative productivity shock across the Euro-area. Fourth, a large inflation shock in the periphery as central bank credibility is lost. The euro’s only silver lining is that the Fed has much greater space than the ECB to ease monetary policy. This would offset part of euro weakness.”

“Using a capital flows approach we argue that EUR/USD would drop by 30% pre-breakup assuming reserve re-allocation. Our assumption is very conservative because we don’t assume private capital flight. Using an alternative valuation framework we estimate that the euro’s fair value would decline by a similar 30% to account for negative productivity and inflation shocks. A powerful Fed response could provide an offset of 5-10%.”

“Even though some legacy currencies such as the Deutschmark could end up appreciating after break-up, it is unlikely the cumulative effect of  break-up is positive. All currencies would end up weakening versus current “shadow” exchange rates against the dollar. This would range from 15% in Germany to 70% in Portugal. Our estimates are highly sensitive to the degree of capital outflows as well as to the size of the productivity and inflation shocks that materialize.”

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2024 FOREXSTREET S.L., All rights reserved.