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."
Is this the beginning of the end? The UK announced yesterday that they have provisionally approved Pfizer’s Coronavirus vaccine. This makes the UK the first country to approve a vaccine, which they state will be available to individual members of the public by next week.
Simon Steve, Chief Executive of the NHS, stated that the bulk of the vaccinations would occur between January and April next year. The Medicines and Healthcare Regulatory Agency (MHRA), the governing body for the UK which is responsible for ensuring medicines and vaccines are acceptably safe, stated that they volowed “an extremely thorough and scientifically rigorous review of all the evidence” and that “the public can be absolutely confident that the standards we have worked to, are equivalent to those around the world.”
The UK framework allows vaccines to be approved while reviewing the data given to them on a rolling basis, which is why it was approved earlier in the UK. This is compared to the United States, which requires a public review and full scrutinization of all the data available. The British Government has secured 357 Million allocations of seven separate vaccines.
The S&P 500 and the NASDAQ were able to squeeze their way to new all-time highs. However, the real winner was oil – reaching $48.40c for a barrel of Brent Crude. It’s edging to break the strong psychological barrier of $50.
The Vaccine has provided a needed boost to the Black Gold. With OPEC+ coming close to a deal, we may see oil breach that $50 mark if OPEC decides to continue the supply cuts.
John Kilduff, a partner at Again Capital LLC, stated that “it looks like there is headway being made, which the [oil] market is looking for.” With the said, US Oil Inventories this week fell lower than what analysts were expecting, with a drop of 754,000, well shy of market estimates of 2.3 Million.
GBP/USD was surprisingly stable, maintaining that 1.337 level. However, EUR/USD blew past that 1.20 mark, currently sitting at 1.21.
Are you going to take the Vaccine when it's available?
EUR/USD hit 1.20 on the last trading day before bouncing off the strong psychological resistance level. This is due to further dollar weakness alongside investors pricing in aggressive quantitative easing from the Fed outpacing the European Central bank. The EUR/USD is up around 2.3% this month.
Moderna is reported to seek expedited vaccine clearance for its Coronavirus vaccine in the United States and Europe after it was shown that its Vaccine was highly effective in preventing covid-19 with no serious safety problems. It is stated that Moderna will apply for an emergency use authorization in the United States and Conditional marketing authorization in Europe. However, the US FDA still needs to scrutinize the data in a public meeting on December 17th, making a vaccine available to the public before the end of the year unlikely.
As stated above, investors are pricing in that the Federal Reserve will outperform the European Central Bank regarding stimulus in the long term. So far, the ECB’s 1.8 Trillion Euros support for the European economy is slightly less than the Federal Reserve’s 3.2 Trillion Dollar support for the American Economy.
There are hints that the Federal Reserve will ease up on the quantitative easing, with Fed officials stating that they are planning to provide more guidance on their bond-buying strategy “fairly soon” and that “Many participants judged that the committee might want to enhance its guidance for asset purchases fairly soon,” according to the meeting minutes published by the Fed earlier in November.
In a rare occurrence, current Treasury Secretary Steven Mnuchin’s announcement that he would allow certain central bank emergency lending facilities to expire at the end of the year and that the Funds backing the program to be returned to the Treasury was met with criticism by Jerome Powell, which did not agree.
However, the ECB is not done yet. With most of Europe still under lockdown, many analysts predict their bond purchase program to be extended in December, with some analysts predicting that they will push for more stimulus.
Macro Valli, head of macro research at UniCredit, stated that “A boost and extension of the Pandemic Emergency Purchase Program (PEPP) is now a done deal, and we also see a high likelihood that the current favorable terms of the Targeted longer-term-financing operations (TLTRO)… will be extended.”
The last factor, Brexit, is slowly chugging along, taking into account the state the UK and Europe are currently in regarding the Coronavirus. Brexit officials stated that Fishing rights are the last Brexit obstacle that is yet to be figured out.
Angela Markel noted that time was running very short of reaching a deal, and some EU member states are growing impatient. “Some member states are now becoming unsettled. There’s not much time left. We hope that these talks will come to a happy ending. We don’t need an agreement at any price. We want one but otherwise, we’ll take measures that are necessary. In any. Case a deal is in the interest of all.”
Tick all the boxes regarding Brexit, the Vaccine, and the Quantitative easing, and we should see the EUR/USD blast past 1.20.
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.
We've recently talked about the potential demise of the U.S. Dollar. What currency is poised to benefit the most from the devaluation of the dollar? Euro is the first thing that comes to mind.
Shortly after the safe-haven trade that pushed the dollar up against major currencies, the Euro started to rally over the U.S. dollar. After strongly piercing through 1.10, a relatively strong downtrend alongside piercing 1.15 with relative strength, It is eyeing up a similar push up on these factors.
Pointed above, we can see that the push past 1.10 – 1.11 broke a 2-year downtrend for the Euro. Furthermore, we can see a similar pattern where the Euro against the US Dollar consolidates for about two weeks before making a push upwards, usually on the back of positive data coming from Europe alongside harmful data coming from the United States. It shows that bulls are most likely just looking for any excuse to push the pair higher.
This is quite unlikely ever to happen, as many commodities such as Gold and Oil are settled using the U.S. dollar. Nevertheless, the current headwinds pushing the U.S. Dollar downwards have been giving the world's second reserve currency a time to shine.
The United States has consistently been posting 200,000+ new daily recorded Coronavirus cases, with the government doing little to nothing to prevent the further spread of the Coronavirus. Meanwhile, Europe has attempted to restrict the virus's spread by imposing mandatory lockdowns in many countries. However, their reopening may be too early as we can see a resurgence in many countries in Europe. However, there is still a stark difference in how the governments have come together to fight the virus, and this may prove to be a game-changer in the long term for the Euro.
The U.S. Dollar is suffering strong headwinds due to inflation concerns, quantitative easing, and general risk-on sentiment in the markets. This may also signal a slow shift in European bonds and equities, with U.S. investors looking elsewhere for yield.
Considering the U.S. dollar's headwinds alongside recent strength in the Euro, it is likely we may see the Euro blow past 1.20 against the U.S. dollar on any positive news regarding Europe.
Everyone has been loving the Euro recently.
The Euro currently sits at a 26 month high at around 1.19 against the U.S. Dollar. Now, it is up almost 12% from its March lows. Everything recently has been compared to how well the Coronavirus response has been in respect of said asset, and the Euro is no exception. The appreciation in the Euro against the U.S. dollar is in a combination of an increase in investor/trader interest in the Euro, alongside the broad weakening of the U.S. dollar.
The U.S. Dollar has weakened from its “safe haven” all-time high earlier in March. This is due to investors and traders looking for markets elsewhere in the world, alongside being wary of the conditions in the United States. They recorded just under 38,000 new Coronaviruses cases today, with over 5.47 million previously registered Coronavirus cases. Therefore, comparatively, the consensus is that Europe has had a better response to the Coronavirus than the United States. With both continents pushing out trillion-dollar stimulus packages, the difference is the cohesion between the politicians that run the government. The United States government have seen a divide across the aisle on how to proceed with the Coronavirus, while the members of the European state has been relatively United.
Regarded as the second world currency, the Euro has taken the front foot on the decline of the U.S. Dollar. Figures from the CTFC collated by the Financial Times show that optimism in the Euro stands at a record high, with net non-commercial positions standing at the highest it has ever been. Furthermore, JP Morgan raised their year-end target forecast for the Euro at 1.20, from a previous estimate of 1.13 against the dollar.
Jane Foley, head of currency strategy at Rabobank in London, suggested that “the CFTC positioning data suggests that the move in the Euro is overstretched,” suggesting a correction may be in place to move higher.
The currency market has been in contrast to how the equity markets have been playing out today. With a further pullback in the U.S. dollar index, down 1.35% over the past five days, the S&P 500 and the NASDAQ closed at all-time highs.
GBP/USD broke 1.30 today, a critical resistance that signals a strong bullish sentiment on the Pound as the dollar weakened on the Fed, sending full message support. Jerome Powell stated that they would keep all support lines open, including bond-buying, low-interest rates, and central bank dollar swaps. Jerome Powell emphasized, “[the fed] is not thinking about thinking about thinking about raising rates.” Andrew Slimmon, Senior Portfolio Manager at Morgan Stanley, stated that the “Fed would keep supporting risk assets.”, suggesting that it would be an excellent time to be long in risk assets.
The rally in the pound comes when the UK still has a 7-day average Coronavirus case figure of around 737, with cases continuing to rise. This number is 26% more since 16th July. On Thursday, there were 846 new Coronavirus cases, the highest since 28th June. This conveys the UK is not fully controlled the Coronavirus.
Boris also faces the issue of Brexit, with a transition deadline expiring on 31st December. The pandemic has made this difficult, dragging the Brexit negotiations on for five years now. The pounds’ strength amidst all the UK’s facing problems shows the strong sentiment of the dollar weakening.
The Euro also rallied against the USD on the weakening of the dollar. Like the Pound, it broke a strong key technical resistance of 1.18. However, like the UK, the continent is experiencing spikes in Coronavirus cases in Spain and Germany. Spain received the largest rise in daily cases since June, booking over 1,200 infections. Similarly, in Germany, sees 902 new Coronavirus cases, up from 684 just a day ago.
The rally in the Euro comes on the back of many tailwinds, such as 750 Billion Euro package and relatively successful handling of the Coronavirus across Europe.
Anish Lal did some excellent technical analysis on the GBP/USD. You can watch it here.