Commerzbank analyst Thu Lan Nguyen says growing concerns over the sustainability of France's public debt have begun to weigh on the euro, which had previously remained largely unaffected by turmoil in bond markets. From an FX perspective, she argues the problematic aspect is the European Central Bank's central role in the mechanism, warning that in a worst-case scenario the ECB could face a dilemma between its mandate to preserve price stability and its responsibility to safeguard financial stability. The common currency's slide suggests markets see a rising probability that the ECB may have to intervene after all, and growing doubts that tools designed for such a scenario would be sufficient to contain the problem, with markets increasingly concerned the ECB could be forced into a more persistently accommodative monetary policy stance to ease pressure on long-term bond yields. Nguyen notes that as long as investors have access to a euro-denominated safe asset, the French government's problems remain a problem for OATs rather than for the euro itself, and that early signs of contagion spilling over to Germany would constitute a clear warning signal for the euro.
Commerzbank AGFrench debt sustainability concerns and ECB dilemma weigh on the euro, with markets pricing a more accommodative ECB stance.
