The ongoing reduction of USD funding pressures in the EUR/USD cross-currency swap market as providing more evidence of the continued deleveraging by euro area banks, notes Barclays Capital.
“The cross-currency basis swap spread captures the price for cross-border wholesale funding. The narrowing of swap spreads since 2012 reflects an improved risk appetite, a reduction in foreign-currency-denominated assets of euro area banks, and better asset-liability matching of the banks’ foreign balance sheets,” Barclays clarifies.
Given that, how will EUR/USD react as banks deleveraging becomes less of a factor?
“With the EUR/USD basis swap approaching more typical levels, it seems likely that the deleveraging effect may have largely run its course. As this diminishes as a catalyst, we believe EUR/USD downside is likely to accelerate, driven by divergent growth and monetary policy outlooks,” Barclays answers.
“We continue to forecast EUR/USD down to 1.30 and 1.27 in 6m and 12m, respectively,” Barclays projects.
