Amongst U.S. Dollar strength across the board coming into 2021, the Euro has come roaring back on further optimism on the vaccine, alongside asset markets strength.
There has been a clear downtrend from February's start, following a clean channel downwards towards 1.195. However, around the 6th of Feb, the pair broke out of the downwards channel on the news that former ECB President, Mario Draghi, was tapped to form a party to lead Italy out of the two crises they faced themselves in – financial recession and the Coronavirus.
Mario Draghi was known for convincing European leaders to take extraordinary measures to save the European Union by implementing controversial monetary policy at negative rates. He emphasized that "for rates to be positive later, they need to be negative today."
But the Coronavirus situation has placed a wrench in that thesis, requiring monetary policy that the ECB doesn't have to give. Nevertheless, he left the ECB in 2019 with a glowing reputation, attaining the nickname "Super Mario." Analysts are cautiously optimistic that Draghi can pull Italy out of their predicament as he did with the Euro.
ECB's Current President, Christine Lagarde, predicted that the recovery in Europe would pick up in the summer, as vaccines roll out across the continent. However, the vaccine rollout in Europe has not come to a good start, with only 3.6% of the continent receiving their first shot. This is in comparison to around 17% of citizens in the U.K. receiving their first shot. Lagarde stated that "We remain convinced that 2021 will be a recovery year" and that "the economic recovery has been delayed, but not derailed. People are obviously waiting impatiently for it."
Currently, optimism on Mario Draghi's appointment has fueled the rise in the Euro, alongside a slight weakness in the U.S. Dollar. However, Europe needs to curb the virus faster than the U.S. does for the Euro to go past 1.23.
If there is a time for a currency to be relatively weak, it's during recessionary periods. A stronger currency entails a rougher time for goods and services to be exported out of the country as those exports are more expensive due to the stronger currency.
This is currently the case for the Euro. From August last year to the latter part of 2020, the EUR/USD fluctuated between 1.16 and 1.19 before shooting past 1.20 at the end of November due to vaccine positivity.
It sits comfortably above 1.20, consolidating between 1.205 and 1.233. Christine Lagarde, President of the European Central Bank (ECB), has a dilemma on her hands: how to contain the strength of the Euro due to positive sentiment while fighting deflation concerns?
Theoretically, it could be argued that the ECB has used up all their ammunition when it comes to monetary policy.
With Interest Rates at 0% for the past four years, alongside the Coronavirus pulling on both sides, with lockdowns forcing businesses to close and consumers to save, a liquidity trap may be underway. The strength of the Euro also gives the ECB limited room to move rates lower. This harks back to the Bank of Japan's issue during the financial crisis, with analysts predicting disinflation, therefore boosting the Yen, thus boosting fears of inflation - a never-ending cycle.
The ECB has purchased over 1.85 Trillion Euros worth of assets during the wake of the Pandemic. However, we may see a situation unfold similar to that of the Fed and US Equities – where the Fed's unwavering support for the US economy has had the side effect of boosting US equities. Further purchases may see an influx of capital in European Equities, increasing the demand for the Euro.
Since the strength of a currency is relative, some analysts predict the only way for the ECB to escape the cycle of a strengthening currency and deflationary concerns is through outperforming the Fed when it comes to asset purchases. Salman Ahmed, global head of Macro at Fidelity International, stated that "In currencies it's the relative game that matters," and that "You can argue that the ECB has been very aggressive in its policy, but has it been more aggressive than others? If the ECB wants to get the Euro down, they will have to outgun the Fed – there is no other way."
Earnings season! As we end another quarter, public companies worldwide will start to open up their books to the market, showing us how well (or not well) they did during the Coronavirus. Here's your week ahead.
With the ECB signaling that they are ramping up measures to meet their mandate of 2% by slashing their already negative rates and broadening their lending requirements, Investors and Traders should expect extreme volatility in Euro currency pairs as Christine Lagarde further elaborates on these measures. Currently, Interest rates are at 0%, with real rates being in the negatives. Any more hints confirming a move for interest rates to go lower by Lagarde, and expect the Euro to weaken dramatically.
The UK was in a position to flatten squash the curve – but they blew it. Fully in their second wave, Prime Minister Boris Johnson has put the country in lockdown too late. Their first wave saw them get around 6,000 new cases per day at its peak. Now they get upwards of 12,000 cases per day. This puts Governor Bailey in a difficult position. He states that "we are by no means out of firepower, not out of luck in terms of policy tools." However, the second wave may deplete the firepower. However, Governor Bailey is for Boris Johnson and the European Union to agree, stating that he thinks "it is in the interest of both sides – lets be blunt – to get an agreement."
The UK publisher "The Mail" disclosed that representatives from Britain's largest lenders have talked to central Bank Officials to prepare for interest rates to plunge below zero. It is stated that Lloyds Bank and NatWest have drawn up plans to invest over 100 Million pounds into upgrading their computer systems to cope with the negative interest rates change. Currently, the UK's interest rates sit at 0.1%.
On UK's unemployment rate – 3 months ago, The Guardian posted an article stating, "If a second wave of Covid can be avoided, the UK's Unemployment Rate is likely to rise to 11.7% by the end of the year…" As we know, the second wave is in full swing meaning unemployment most definitely going to rise further than the 11.7% predicted. Market consensus expects the three month unemployment rate to be 4.3%, slightly higher than the 4.1% print the last time.
The United States experienced a mostly expected curveball last week, with its President, Donald Trump, contracting the Coronavirus. With election season coming up, Trump has vowed to reopen the United States Economy as fast as possible in hopes for a Hail Mary. However, his reopening may have cost many American lives, as the Coronavirus continues to ravage the economy. With that said, analysts predict CPI to increase slightly to 1.4%, from 1.3% print previously.
Australia has done something that the UK has not been able to do - recover from a second wave. The outbreak in Victoria has largely been controlled, although they have continued to stay in lockdown. However, it seems like geopolitical issues have come to hinder their economy. China has reportedly sent out orders to several state-owned steelmakers and power plants to stop coal imports with immediate effect.
Alongside the government's 98 Billion dollar stimulus plan, the market is pricing in a 75% chance that the Reserve Bank of Australia will cut interest rates from 0.25% to 0.1%. This was from the RBA's deputy governor Guy Debelle hinting at imminent further easing. See moves in the Australian Dollar if Governor Lowe continues to give hints to crate cuts.
On Thursday, expect a drop of around 50,000 Jobs in Australia. This is a far cry from the 111k positive employment change in the previous print.
On the Commission on Presidential Debates' recommendation that Trump and Biden debate virtually due to Trump testing positive for the Coronavirus, Trump says no. Now both candidates are scrambling to find venues to reach their voters in the last stretch of the election. The debate on 22nd October, set to be held in Nashville, will likely be the final face-off between the two candidates before election day.
With people in the United States moving freely, it's a surprise that Retail Sales are predicted to be slightly down this month at 0.5% as suppose to 0.6% the month before. However, this may be due to the employment figures last week being worse than expected.
A busy week ahead as we approach earnings season, and crucial election periods creep up. We have the new iPhone release coming out on Wednesday (Tuesday in America), and banks the likes of Citibank and JP Morgan releasing earnings this week. Stay safe, Trade safe.
Just as you think things couldn't get weirder – arguably the most powerful man in the world, President Donald Trump, and the First Lady contracted the Coronavirus. This is after their aide, Hope Hicks, was stated to have contracted the Coronavirus the day before their announcement. This week ahead could be interesting.
There have been conflicting accounts to Trump's health (depending on the source of news you choose to absorb). To add to this, Trump's leading health officials have been giving conflicting and confusing information to the public, confusing press officials, the people, and the markets. Sean Conely, the White House Physician, told reporters that the President was receiving oxygen, after stating that he had not been treated to oxygen on Friday. He admitted to sharing misleading information initially to "reflect the upbeat attitude" of Trump and his doctors. However, he does state he is "doing really well."
Donald Trump has received three different drugs during his stay at Walter Reed National Medical Center. He first received a dose of experimental medicine by Regeneron Pharmaceuticals Inc before making his way to the hospital. During his stay at Walter Reed, he has been given Remdesivir and dexamethasone.
Futures were all over the show, initially dropping hard over uncertainty, however rebounding on positive news on his health. Expect an extremely volatile week ahead, as we slowly hear word on Donald Trump's health. Here is your week ahead.
The US dollar and the United States Equities need upbeat news to balance any negative news regarding Trump's condition. Trump has been hard at work while in hospital trying to continue his duties, mainly to dot the I's and cross the T's on a second stimulus bill, which the Federal Reserve believes is required to pull the United States economy out of the slump it is in. However, Non-manufacturing ISM's are expected to print a slightly bearish figure of 56, down from 56.9 the month before.
Alongside the ISM figures, Federal Reserve Chairman Jerome Powell is set to speak, providing further guidance on the American Economy's future. We should see Powell give support for more fiscal stimulus from the government. However, a more than expected dovish tone and less than expected financial support from the Jerome Powell and the FOMC minutes should see equities fall, considering the weak fundamentals and volatility Trump's hospitalization brings.
Australia is slowly coming out of its second wave as cases calm down in Victoria. Talks of a Trans-Tasman bubble between New Zealand and Australia have come back, with citizens who have not been in a designated Coronavirus hotspot in the past 14 days will be able to travel into New South Whales and the Northern Territory. It is interesting to note that the bubble will only be one way – with New Zealanders being able travel to Australia. However, Australian citizens would not be allowed to travel to New Zealand. Tickets are costly at around $900 NZD for a one-way ticket to Sydney. Seven out of the 11 economists at UBS Group expect the Reserve Bank of Australia to expand their quantitative easing, alongside a heightened possibility for the RBA to cut rates in the next six months. However, the Governor of the RBA, Philip Lowe, has pushed back against negative rates, stating that negatives rates are extraordinarily unlikely in Australia due to downsides on consumption and sentiment.
This is after a farewell email was sent to staff by Peter Tulip after he resigned in August, stating that the Reserve bank has a board "that does not understand monetary policy or statistical research" and that "..although there are lots of great people at the bank, our environment makes the organization dysfunctional". Rates in Australia are currently at 0.25%, with a consensus for rates to stay the same.
The main interest investors and traders should look out for when ECB President Christine Lagarde speaks later this week is implementing a potential digital currency. This would be an attempt to further push their quantitative easing in all of their nooks and crannies of the European Economy. Christine Lagarde state that "Europeans are increasingly turning to digital in the ways they spend, save and invest" and that "[the bank's] role is to secure trust in Money.. making sure the euro is fit for the digital age". They are set to go two directions; one would use a centralized system similar to how cash is handled today. The alternative would be a decentralized system with rules, identical to cryptocurrencies such as Bitcoin – however, it would not be self-governing. Instead, it would be governed by third parties. They expect to decide whether to implement a digital euro after the public consultation in mid-2021.
Christine Lagarde is also set to touch on the European Economy and its current road to recovery alongside recent Euro strength.
A couple of weeks ago, the Bank of Canada kept rates at historically low levels at 0.25% and continued to see an increase in holdings of government bonds as they continue to propel the Canadian Economy. Tiff Macklem, Governor of the Bank of Canada, stated in a speech that the Bank of Canada "will be supporting the economy through the full length of the recovery, helping to bring it back to full capacity with full employment." They plan to keep interest rates at unpreceded levels until excess capacity is absorbed and inflation targets are reached. Expect Macklem's speech to be much of the same, reiterating its support for the Canadian Economy. Any deviation may see wild swings in Canadian Dollar pairs.
Eyes on the news this week, particularly on Trump's Coronavirus recovery. Stay safe, Trade Safe.
The Euro against the US Dollar is approaching 1.165 – a historically busy support/resistance area.
Traders and investors in the past couple of months have seen an 11% appreciation in the Euro. From a country's viewpoint, an appreciating currency is seen as bad as it makes the countries (in the case, the continents') exports more expensive for other countries. This is incredibly tough on German and French car automakers, as it means their cars would be more costly to sell overseas. On the contrary, this makes importing goods from other places cheaper.
Christine Lagard has tried to talk down the Euro's appreciation, stating that she was "very attentive to the appreciation of the Euro." Furthermore, Philip Lane, the ECB's chief economists, noted that the "euro-dollar rate does matter
Historically, the Euro has been higher. Before the Global Financial Crisis in 2008, it was at around the 1.50 level. However, the pair is twofold – we have to figure out what will happen to the US dollar – primarily hinging on the market's expectation of the election and general economic trends.
The US dollar is up 1.4% this week, reducing its 2020 decline to around 2.2%. The dollar has slowly rallied on the selloff of US equities from their all-time high. With a historically inverse correlation with Gold, the yellow metal has been suffering as investors and traders weigh up the possibility of the Fed actually reaching that 2% inflation target.
Furthermore, with interest rates at a record low, negative yields for long term bonds make it more appealing to hold the US dollar instead of bonds.
And if Biden wins the presidency? Considering he wants to enact tax hikes and expensive green policies, the US dollar should depreciate against its peers. However, if Trump is re-elected, we may see the opposite due to his pro-business, low tax policies. However, this may be totally incorrect, depending on market sentiment regarding the Coronavirus at the time.
What's your thoughts on the US dollar?
The ECB decided to leave interest rates unchanged, with interest rates staying at negative 0.5%.
The ECB stated that it is closely monitoring the recent strengthening in the Euro, citing inflation issues in the medium term Christine Lagarde noted that it would “Carefully assess incoming information including developments in the exchange rate, with regards to its implication for the medium-term inflation outlook.”
The issue with the strengthening of the Euro is that it will become more expensive for importers in other countries to purchase goods from Europe, possibly hindering the Coronavirus recovery. Analysts are surprised in the relatively bullish tone the ECB has on the Euro, given a strengthening in the Euro may hinder the Coronavirus recovery. Dean Turner, an economist at UBS Global Wealth Management, stated that “Perhaps the only surprise was the reluctance of President Lagarde to push back on the strength of the euro during the press conference.”
This leads to suggest that Christine Lagarde is trying to stray away from Mario Draghi’s precedent of negative interest rates, once stating that “For rates to be higher in the future, they need to be lower today.” Even with the pandemic, I believe Christine Lagarde is set on reversing that trend – Using the Coronavirus as an upper hand in pushing the ECB rates favorable. With that said, it is likely we will not see favorable interest rates anytime soon as GDP annual growth rates dropped 14.7%
However, with Christine Lagarde having a relatively loose stance on the strength of the Euro, Christine Lagarde objective to pull Europe out of the Coronavirus as quick as possible to push interest rates back higher may set a long term goal for the Euro at 1.40 against the US Dollar, not seen since 2014.
Last week was a bloody week in the markets, with US equities selling off on fears that the market has been overstretched. The NASDAQ, Dow Jones, and the S&P 500 were down 4.52%, 3.66%, and 3.28%, respectively.
As we approach election season in the United States, traders should be looking out for changes in future policies which may whipsaw the market.
Investors and traders are heading into a turbulent start of the week, with Hong Kong/ China Tensions increasing as we get close to election season. This may incentivize countries like Australia and the United States to implement policy changes that many move the markets.
Leshgo! Here is your week ahead.
All dates are in NZDT.
It has been a turbulent week for Japan, as total Coronavirus cases are starting to creep up amidst Prime Minister Shinzo Abe's resignation. Furthermore, Typhoon Haishen just landed, causing more disruption to an already chaotic year. Analysts predict a significant drop in GDP growth by 28.6% - Brutal, considering the Japanese economy has been in the slump in the past couple of years.
With the European bloc having a relatively collective response regarding the pandemic, individual countries have started to release specific stimulus plans. For example, France revealed a 100 billion Euro stimulus plan, the biggest than any other country in Europe. The stimulus is just under 4% of its GDP. Analysts predict a 12.1% drop in their growth rate quarter over quarter, with the ECB expected to leave rates at 0%.
Canada has been relatively prosperous in trying to contain the Coronavirus without implementing a strict lockdown. In Quebec, the Coronavirus's epicenter earlier this year has stated that they plan to have students return to school as soon as possible. Economists predict the central bank to keep interest rates at 0.25%, with 80% of Economists surveyed by Finder expecting no rate change until 2022. Oxford Economists Tony Stillo and Michael Davenport stated that the Bank of Canada has signaled that they will keep the interest rates at 0.25% "until economic slack is absorbed so that the 2% inflation target is sustainably achieved."
As the United Kingdom continues to grapple with the Coronavirus, Prime Minister Boris Johnson insists that Brexit talks should continue with no delay. The United Kingdom has recorded over 347,000 Coronavirus cases, with the UK recording the highest number of daily Coronavirus cases today since May.
Similar to Japan, the United States has a turbulent couple of weeks ahead. With main market indices diving, traders and investors should brace for market volatility in the times ahead alongside election season getting into full swing. With the Federal Reserve pledging a new tool combatting inflation, these data figures may be too early to see whether this tool is working. However, a higher than expected figure than the market forecast of 1.2% may see Gold push higher alongside the dollar go lower.
Trade safe this week ahead.
Busy week ahead as September kicks in. As New Zealand and the United States elections slowly approach, the Coronavirus pandemic will most likely be the center focus for many parties and how they handle the post Coronavirus world. Here is your week ahead.
Like most of Europe, Germany is experiencing an uptick in cases as a reopening of Europe too early takes its toll. However, this has not stopped protesters storming the German Government building in Berlin alongside Germany's total cases ticked over 243,000. With prices of oil slowly increasing, analysts expect inflation to increase slightly by 0.1%. Furthermore, with Germany's unemployment benefit allowing unemployed citizens to claim up to 67% of their previous wage, analysts predict no change in the unemployment rate at 6.4% in the week ahead.
Australia continues to fight a hard battle with the Coronavirus, after their original strategy of having no lockdown has lead to massive spikes in Melbourne, Victoria. Australia recorded 123 new cases of the Coronavirus – all in the state of Victoria. Denita Wawn, Master Builders Australia's Chief Executive, stated that "Our industry is facing a blood bath… Private sector investment is evaporating, and the government must step in to save businesses and jobs," conveying how dire the situation is in Australia. However, the Reverse Bank of Australia is expected to hold interest rates at 0.25%. Any deviation from this consensus is most likely to move the Australian dollar significantly. Furthermore, Melbourne's sustained lockdown has seen forecasts of GDP growth to drop to -5.3%, down 6.7% GDP growth of 1.4% in the previous quarter.
One of the country's worst-hit with the Coronavirus, Italy, has recorded over 268,000 cases with cases continue to spike, with newly registered cases yesterday just over 1,200. Italy is predicted to be one of the first to get a grant from the Bloc's 750 Billion Euro grant as it suffers from worsening GDP growth pre-Coronavirus. Italy is set to release Manufacturing PMI's to 52, slightly higher from 51.9 last month.
Europe is currently experiencing a resurgence in Coronavirus cases as an early lifting of lockdowns just before Summer has forced a spike across Europe. However, many countries are against a second lockdown due to the Economic calamity it will bring. Analysts predict a drop in the inflation growth rate to 0.9%, down from 1.2% in July.
The United States continues to post daily double-digit Coronavirus cases as their total case count tops 6 Million. As elections approach in just over a month, President Donald Trump continues to let the economy open to win over voters. Non-farm payrolls are predicted to be just over 1.4 million, down from a previous 1.73 million print.
As usual, we have many critical economic events that traders need to watch out for to avoid being whipsawed by the market in the week ahead.
Markets have been moving today on the back of positive vaccine news amongst concrete stimulus hopes.
Silver rallied to a peak of $21.319 as investors and traders bet that a push to green energy will provide a silver lining to the metal. It is interesting to note that Silver has outperformed its counterpart Gold, with a 70% rise since its March lows. Analysts at Citibank expect Silver to hit $25 an ounce by the middle of 2021. Citi expects a clean energy push if Joe Biden, Democrats Presidential Nominee, gets elected. Biden has placed importance on clean energy in his $2 Trillion plan to push the US out of the Coronavirus's recession. Furthermore, the latest stimulus 750 Billion Euro stimulus plan from the EU has allocated a third of that recovery fund into fighting climate change. Silver is extensively used in the production of solar panels.
However, Silver's rise does not mean its Gold counterpart is doing too bad either. Gold reached a new time high, with the spot price rallying to 1,483.45 an ounce before pulling back slightly. Over $40 Billion has flowed into gold-backed ETFs in the first year, breaking last year's record. Downwards pressure on the US dollar due to quantitative easing and fiscal stimulus has forced investors to look towards these metals for yield.
Brent Crude Oil broke past $44 in the New York session as fiscal stimulus and backwardation finally broke past the resistance of $43.929. The black gold reached a peak of $44.998, before pulling back slightly. However, oil still has a little bit more to fill that gap to $45.228. This is in the midst of Chevron acquiring Noble energy in an all-stock deal for $13 Billion, a 7.5% premium from its current value. An industry filled with bankruptcies due to the Coronavirus, Chevron stands out with a strong balance sheet enabling it to take advantage of the crisis alongside keeping their dividend payout.
The Euro rallied against the US Dollar, peaking at 1.15289 as the European Union clinches on an agreement on stimulus funding. The recovery fund worth 750 Billion euros hopes to pull the bloc out of the recession. With a myriad of bond sales and taxes to finance the stimulus, the fund expects to give out 390 Billion Euros of Grants to harder-hit countries such as Greece and Italy, and over 360 Billion Euros in loans. "We are 27 around the table, and we managed together to produce a budget," Macron said at a press conference alongside Merkel. "In which other political sphere in the world is that possible, is that done? None."
Finally, in the Equity markets, we saw the SP500 and Dow Jones clinching a gain in the New York session, finishing higher than the NASDAQ. This is on the back on hopes that Congress can pass a second stimulus deal. However, agreement on the size of the stimulus cannot be agreed upon. Nancy Pelosi believes that $1t is "not close to enough" for the next stimulus. NASDAQ pulls back slightly of their all-time as investors await on tech earnings this week. However, they still lead in earnings relative to other equities.
Anish Lal has some excellent technical analysis on the rise of Silver today. You can watch it on our YouTube account here.
The Euro sees its longest streak in 15 years on the back of Christine Lagarde, announcing that the ECB will provide an extra $1T in stimulus to combat the effects of the Coronavirus. The Euro against the USD has spiked to 1.127 to just under 1.135 on the back of extra stimulus. Pointing to inflation and price stability as concerns, Christine Lagarde stated a “unanimous view that action had to be taken.” However, with over six years of Quantitative easing and negative rates, the Euro’s weakness has benefited its exporters. This may change as the ECB puts its foot down in trying to rescue Europe.
The European Union was hit hard during the Financial Crisis, with the Annual GDP growth rate dropping to as low as -6%. Europe did experience some GDP growth in the early 2010s, however, quickly reverted back due to the strong Euro dollar. Mario Draghi, ECB’s president at the time, implemented a drastic Quantitative easing program alongside negative interest rates. This gave the European union the boost it needed, with GDP Growth staying positive alongside the Balance of Trade, also staying positive in the following six years.
With negative interest rates, investors in the European Union struggled to find yield while the American financial markets were experiencing capital appreciation alongside positive yield. Draghi consistently held that “for rates to be higher in the future, they need to be negative now.” However, with a change of leadership in the ECB at the turn of the decade, Lagarde is seen to take a tepid tone when it comes to negative rates. This was explicitly exemplified during the peak of the Coronavirus. When central banks all around the world were slashing their rates, Lagarde stood firm and kept rates as is. Lagarde is looking at the long-term future of the European Union and is possibly using the current pandemic to spur a change. However, with Lagarde’s new focus on getting out of this real negative rate environment, this may bode detrimental to exporters in Europe. A stronger Euro means it will cost more for buyers of European exports to purchase the Euro, possibly turning around their positive balance of trade.
The Euro Dollar is currently at a key resistance around the 1.15 level, which has not been consistently able to break since quantitative easing and negative rates were implemented in 2014. We need to see if bulls will break this resistance, solidifying markets consensus for a strengthening in the Euro. If it sees a rebound at around this level, we may see a deep contraction to the downside.