SEK: Early Strength Takes a Breather

Citi calculate that “if Euro area banks targeted the same securities/liquidity ratio as before the pandemic, then German and Italian banks would still have substantial room to increase their domestic debt holdings”.

• They believe that “a possible reason Euro area banks are holding less government paper against ECB cash relative to the pre-pandemic is that they are factoring in the expected future decrease in excess liquidity stemming from QT”.
• Assuming this continues at a EUR40/45bn monthly pace, Citi observe that “the share of Euro area sovereign paper in the average bank’s HQLA L1 portfolio would be back to pre-pandemic levels in 12 months - without the need for more outright bond buying”.
• They also note that “even under such a scenario, some jurisdictions could still raise their domestic government bond holdings. The key assumption here is that while excess liquidity declines as QT continues, it declines proportionally across bank jurisdictions - which is broadly consistent with the liquidity distribution stabilising over the past year. Under such assumption, our simple analysis suggests that domestic sovereign debt purchases by Italian and German banks can continue in the medium-term”.

• While the Banking sector might not be the top performer, the SX7E continues to be closely watched.
  The report that Unicredit was boosting its stake in the Greek Alpha Bank has provided an healthy upside impetus so far Today.
• SX7E would see the initial resistance at 205.51, this was May's high printed on the 20th May, which was also its best print since August 2010.
• Above this level would Open to 217.62, the 38.2% retrace of the whole 2007/2020 range.
• Unicredit traded as high as 58.38 on the 21st May, but the big resistance would be seen at 66.8366, the 2011 high.

(Chart source: MNI/Bloomberg).