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“We find that the euro area’s exposure to Turkey is relatively limited via a number of channels,” TD Securities analysts argue.

Key quotes

“As long as the crisis remains mainly isolated to Turkey, spillovers to the euro area and other G10 countries are likely to be muted. The ECB remains on track to continue its taper later this year and raise rates in 2019H2.”

FX: The FX response becomes headline driven from here for higher-beta currencies. Investor sensitivity to Turkey may ease as direct spillovers and linkages look limited. For EUR, the worst may be past unless the situation deteriorates dramatically. We think EURUSD longs offer some value at these levels, but the highly uncertain landscape favors positioning for a potential rebound via 2M(+) call options.”

Rates: The ECB has laid out a clear policy outline for its QE programme and forward rate guidance, which is unlikely to be altered, in our view. Meanwhile, short-end is currently pricing around 10bp of rate hikes by December 2019. If the global risk appetite worsens from here, we would expect markets to push out rate hike expectations to 2020. But that is still not our base case. We continue to favour range trading for Bunds in the next couple of weeks. At current levels, we think any sign of stabilization in EM presents an opportunity to sell Bunds.”