The study, requested by European legislators, was aimed at evaluating the risks that a digital currency would pose to the banking sector under different scenarios

International News via Reuters:

A digital euro could drain up to 700 billion euros ($810.88 billion) in deposits during a run on commercial banks, pushing around a dozen euro zone lenders into a liquidity squeeze, a European Central Bank simulation showed on Friday.

The study, requested by European legislators, was aimed at evaluating the risks that a digital currency, essentially an electronic wallet guaranteed by the ECB, would pose to the banking sector under different scenarios, including a hypothetical “flight to safety”.

The ECB has presented the digital currency as an alternative to U.S.-dominated means of payment, but bankers and some lawmakers fear it may empty banks’ coffers.

The ECB’s study found that, were there to be an unprecedented run on commercial banks, depositors would withdraw 699 billion euros from euro zone banks to park them in digital euros if a limit on individual holdings was set at 3,000 euros each.

This is equal to 8.2% of all retail sight deposits, although the impact would be greater for small market lenders and retail banks, the ECB said.

Under this scenario, which the ECB described as highly unlikely, 13 of the 2,025 banks in the analysis would deplete their mandatory cash buffer, as measured by the Liquidity Coverage Ratio.

These figures may be an overestimation as they don’t consider the fact that some depositors have more than one bank account, the ECB said.

Under the ECB’s “business as usual scenario”, in which depositors don’t make full use of their digital euro allowance, just over 100 billion euros would flee banks’ coffers, leaving the sector well within liquidity requirements, the study found.

And even this outflow could be more than offset by an ongoing trend out of cash and into electronic means of payment, which should add to banks’ deposits, the ECB added.

The ECB also simulated individual holding limits of 500 euros, 1,000 euros and 2,000 euros, obtaining lower outflow estimates.

“The analysis confirms that holding limits effectively restrict deposit outflows from the banking sector to levels that safeguard the stability of the financial system and support the correct formulation and implementation of monetary policy,” the ECB said.

It also found that a 3,000 euro holding limit would reduce banks’ return on equity by an average 30 basis points, although the impact differs country by country.

EU finance ministers agreed last month a roadmap for launching the digital euro but retained a say on its eventual introduction and on the holding limit.

($1 = 0.8633 euros)

Reporting by Francesco CanepaEditing by Frances Kerry

The yen edged up 0.2% to 152.7 per U.S. dollar but was still close to its weakest since mid-February, heading for a 3.5% drop in the week, its biggest decline since last October

International News via Reuters:

The yen headed for its steepest weekly drop in a year on Friday, as the chances of a near-term rate hike faded, while the euro was rooted near two-month lows by political crisis in France.

The yen edged up 0.2% to 152.7 per U.S. dollar but was still close to its weakest since mid-February, heading for a 3.5% drop in the week, its biggest decline since last October.

Its drastic drop has been triggered by concerns that the Bank of Japan may not hike interest rates again this year after fiscal dove Sanae Takaichi’s surprise victory to lead the ruling party, stoking worries of Japanese authorities needing to step in to support the yen.

Japanese Finance Minister Katsunobu Kato said on Friday that the government was concerned about excessive volatility in the foreign exchange market. Takaichi said on Thursday she did not want to trigger excessive declines in the yen.

“The Ministry of Finance is very sophisticated, they’re very experienced, and I think they would use verbal intervention beforehand. And in a way, I think they have,” Rabobank chief strategist Jane Foley said.

Takaichi said on Thursday that the BOJ is responsible for setting monetary policy but that any decision it makes must align with the government’s goal.

She looked set to become Japan’s first female prime minister in a parliament vote that was expected on October 15. But the date will be likely pushed back after the Liberal Democratic Party’s junior coalition partner Komeito pulled its support, breaking their 26-year-old alliance. 

Traders are currently pricing an about 45% chance of a rate hike from the BOJ in the December meeting and are only fully pricing in a 25-basis-point hike in March.

FRENCH DRAMA DENTS EURO

The euro headed for its biggest weekly decline in 11 months, but managed to edge up 0.2% to $1.1586, near its lowest for two months. Political turmoil in France has weighed heavily on the single currency in the last week.

President Emmanuel Macron is searching for yet another prime minister, hoping his next pick – the sixth in under two years – can steer a budget through a legislature riven by crisis.

The political paralysis has made it deeply challenging to pass a belt-tightening budget and has made investors increasingly worried about France’s yawning deficit, on top of evidence of slowing momentum in other key economic engines such as Germany.

“The data from Germany’s not good, and therefore I think that makes the euro a little bit more susceptible to wobbles on the French news,” Rabobank’s Foley said.

As a result, the dollar index, which measures the U.S. currency against six others, neared two-month highs around 99.24 and headed for a weekly rise of 1.7%, its biggest in a year.

“The recent dollar rally has gone against market positioning and prompted a partial covering of USD shorts,” said Chris Weston, head of research at Pepperstone.

“There remains a high degree of scepticism that the USD can materially push through 100, a level in the dollar index that was quickly reversed in May,” he said in a note.

With the U.S. government shutdown continuing and little to no economic data for investors to parse through for clues on the path the Federal Reserve is likely to take, markets are keeping an eye on comments from policymakers.

The influential New York Federal Reserve President John Williams signalled on Thursday he would be comfortable with cutting interest rates again, despite some policymakers’ qualms about rising inflation that suggest such a decision would not be easily made.

Traders are pricing in a 95% chance that the Federal Reserve cuts rates by 25 bps at its October meeting, while the odds of an additional cut in December have dropped to 80%, from 90%, in the past week, according to the CME Group’s FedWatch Tool.

Additional reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong, Kim Coghill and Emelia Sithole-Matarise