Morning Commentary: Dr. Jekyll and Mr. Hyde

Foreign Exchange - Morning Commentary
Dr. Jekyll and Mr. Hyde
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
From the start of 2020 through the end of February, EURUSD was pretty much a one way train down due to economic concerns.  With COVID-19 and oil price concerns flaring up and adding further concerns to factors behind euro weakness, it would seem logical that the euro would weaken further.  However, from the end of February through roughly the first half of March, EURUSD performed roughly in line with traditional safe haven currencies such as the CHF and JPY. 

The implosion of the equity markets clearly illustrates that markets’ remain concerned on policymakers’ ability to keep up with the negative economic implications of COVID-19.  To this end, the “R” word has started to surface with more frequency so it makes sense that safe haven assets like the CHF and JPY would be in demand.  The more interesting question is whether or not the EUR would continue to perform.

To us, the answer is likely no.  While EURUSD did make a run from 1.08 towards 1.15 over the span of ~3 weeks, this was most likely due to an unwinding of euro funded carry trades as market data showed a significant volume, especially in emerging markets, as well as the pricing in of aggressive Fed rate cuts.  With the Fed taking its rate down to the zero lower bound, further cuts are unlikely.  As a result, the euro’s correlation to equities has gone from negative (safe haven) to positive (cyclical).  

Looking forward, the expectations remain for the euro to continue to weaken during periods of market stress, along the lines of what it did during from the start of the year through the end of February.  Economic data remains weak in Europe.  With an increasing number of EU countries imposing economically disruptive social distancing measures, it is reasonable to expect economic headwinds to only get stronger and weigh on the euro. 
  • Fiscal policy conversations have begun to pick up steam.  New Zealand unveiled a fiscal package worth ~4% of GDP and the UK is expected to announce a supplemental package today.  In the US, the Senate is expected to vote and pass a virus bill with the Treasury Secretary expected to unveil stimulus measures totaling $850bn or more. 
  • Some of the hardest hit European equity markets (France, Spain, Italy) have either banned short selling of equities to support stability in the markets.  Additionally, the Bank of Japan has bought a record amount of ETFs. 
  • Canadian PM Trudeau announced new travel restrictions that ban the entry of foreigners into Canada with some exceptions.  For now the ban does not include US citizens.  France has also taken steps to impose a 2 week lockdown to stop the spread of the virus.
  • The two day Fed meeting that was scheduled to begin today has been cancelled due to the emergency action taken over the weekend.  The next meeting is April 29.
  • US retail sales disappointed expectations at -0.5% vs. expectations for a 0.2% gain.  Industrial production beat expectations with a 0.6% gain against expectations for a 0.4% increase. 
  • Germany’s ZEW survey data reported a very weak report.  The expectations section fell -49.5 and the current situation section fell -43.1.  Both were expected to fall -30.0.
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