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According to analysts at Nordea Markets, the big repricing of the EUR, due to Italian risks, happened already in the spring, when both EUR/CHF and EUR/USD simultaneously dropped, as Italy-Germany spreads widened after the March election.

Key Quotes

“Italy risks have not been as big a EUR driver this time around, as we would otherwise have expected a further drop in EUR/CHF to accompany the lower EUR/USD exchange rate.”

“Rather shrinking excess liquidity in USDs has been the driving force behind the  continued strong USD versus the EUR.  Our assessment is that EUR/USD will trough before the turn of the year, with mid-November as a likely timing.”

“Going into 2019, also the excess EUR liquidity will start to shrink  (the number of electronic EURs in excess of reserve requirements),  as the ECB has stopped its net asset purchases and European banks repay TLTROs.  Tragicomically, Italian banks repaying TLTROs could be a driving force behind a stronger EUR into the spring next year.”

“Should the Italian story continue to weigh on the EUR, we estimate a sensitivity of roughly 2.5-3% weaker EUR in trade-weighted terms per 100bp wider 10-year spread between Italy and Germany.”