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EUR/USD Pushes Higher On Draghi's Appointment

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.

EUR/USD Pushes Higher On Draghi's Appointment

Mario Draghi Boosts The Euro

Former ECB President Mario Draghi

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.

Euro's Strength Dependent On Stronger Vaccine Rollout

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.

Lagarde needs to place a lid on the Euro

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?

ECB needs more than interest rates

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.

Only useful tool is asset purchases – however, it may have a side effect of boosting the Euro further

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."

Markets bounce back on stimulus hopes

Markets today bounced back as stimulus talks have come back into question. The NASDAQ is up around 0.7%, while the S&P 500 and the Dow Jones were up 0.8% and 0.43%, respectively.

NASDAQ in Blue, Dow Jones in Teal, SPX in Orange

This is after the Market's fell around 1.4% a couple of days ago on Trump's tweet, stating that he has entirely stopped stimulus talks, saying Nancy Pelosi has been negotiating in "bad faith." However, Trump has slowly come back on the statement, as Trump allies believe it may have created the political risk he'd be blamed entirely for the economic fallout. He told Fox Business that he has reinstated talks about a stimulus bill and is now "starting to work out." "We started talking, and we're talking about airlines and we're talking about a bigger deal than airlines. We're talking about a deal with $1,200 per person, we're talking about other things."

The contested stimulus bill was between the Democrat's $2.4 Trillion dollar proposal versus the Republican's $1.6 Trillion dollar proposal. The Democrats have countered with $2.2 Trillion. However, the white house has not provided a counteroffer to that proposal. Nancy Pelosi is also pressing for language in the bill to limit Trump's ability to deliver virus testing and treatment funds to other projects.

Oil Markets seeing a rise

WTI up 3.3%

Furthermore, we saw Brent Crude and WTI rise around 3.3% as energy companies on the Gulf coast evacuated 183 offshore oil platforms and halted nearly 1.5 million barrels per day as a safety precaution to Hurricane Delta. WTI and Brent are hovering around $41.25 and $43.32, respectively.

Europe Markets seeing a slight sell-off

In the European markets, we saw the EUR/USD sell-off after ECB officials signaled that they were ready to ensure inflation moved towards their mandate, including slashing their already negatives rates and broadening their Targeted Longer-Term Refinancing Operations (TLTRO's), which stimulates banks to lend. EUR/USD is down around 0.2%.

Euro approaching 1.165 as bull run softens

The Euro against the US Dollar is approaching 1.165 – a historically busy support/resistance area.

EUR/USD Entering a strong support/resistance zone

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.

A possible bull run in the US dollar may slow Europe's recovery.

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?

ECB leaves rates unchanged

The ECB decided to leave interest rates unchanged, with interest rates staying at negative 0.5%.

Euro Against the US Dollar

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.”

Strengthening in the Euro will hurt exporters

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%

Long term outlook for the Euro may be higher

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.

Euro priming up for 1.25?

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.

Euro against the US Dollar

Technical trends point to a move higher in the Euro

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.

Euro wants to take the throne as the world's reserve currency

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.

Europe has relatively outperformed the United States regarding the Coronavirus, benefiting the Euro

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.

And obviously, U.S. dollar weakness

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.

Strong Bull Interest in the Euro

Everyone has been loving the Euro recently.

Euro against the US Dollar up nearly 12% from its March lows.

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.

Weakening of the U.S. Dollar helps boost Euro

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.

Investor sentiment in the Euro is at an all-time high

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.

However, some believe the euro bull run is on its last legs

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.

Euro eyeing out 1.18 against the dollar

The Euro has been on a tear recently, up 8.55% against the US Dollar over the past three months as investors become increasingly more confident in the continent.

Euro against the US Dollar over the past three months

Euro advancing on positive and united Coronavirus response

The European Union recently has had many tailwinds as of late: Containment of Covid-19, general alignment in how to combat the Coronavirus, and their 75 Billion euro recovery package lead investors to believe that Europe is where outperformance is.

Given the recent expansion in the valuation of US equities, specifically tech stocks in the NASDAQ, the premium for owning non-cyclical internet businesses have been quite expensive. The NASDAQ trades at a 29.88 multiple, making value stocks such as banks in Europe look dirt cheap. For example, UBS and Deutsche Bank have a price/earnings ratio at 9.69, and Deutsche Bank has a negative P/E ratio with both trading at price/book value of less than 1. Therefore, the Euro may be getting a boost from US investors pulling their money out of the local market and investing in companies in Europe.

There has been an increase in technical factors pushing the Euro higher. Recently, we have seen the EUR/USD push above its 200-day moving average during its recent push past 1.17. The last time the Euro pushed past the 200-day moving average was in 2018. We may see Euro gap 1.18 on worsening US macro conditions and a more pessimistic view from the Fed than was expected this coming week.

US Dollar Index

However, the Euro’s strength may be partially due to the weakening in the US Dollar. The Dollar index is down 6.58% in the past three months. With the US still pumping cases across the states with no official Coronavirus plan, investors have lost interest in the US Dollar safe-haven trade as value pops up across Europe. With that said, the US reported 65,809 daily cases, a 1.6% decrease from the previous weeks’ 7-day moving average. This is a positive sign for US strength; however, this is still miles away from flattening the curve, as many other countries have done.

Anish Lal, an analyst here at BlackBull Markets did an excellent overview on the 200 day average for the Euro/US Dollar. You can watch it here.

Week Ahead: Rates, Jobs, GDP and CPI Data

The Financial Markets have a heavy data week ahead. With geopolitical tensions ratcheting up, and concerns turning to how governments will slowly pull back their unprecedented support, we are starting to see how the world reacts to a post-Covid world. Currently, they are 8.92 Million confirmed cases globally, with 467k deaths. Here is your week ahead.

Global Coronavirus Cases in Blue, Coronavirus Deaths in Red

Reserve Bank of New Zealand Interest Rate decision –  Wednesday, 24th June

With New Zealand entirely out of lockdown, threats of random Coronavirus cases popping up have increased. Facts have emerged from individuals entering the country with special exemptions and not adhering to the quarantine rules. Currently, the country has 1,161 confirmed cases, with 22 deaths. With the RBNZ implementing asset purchases of $30 Billion, the central bank was ready to take the full brunt of the Coronavirus for the financial markets. With that said, analysts predict the central bank to keep rates as is at 0.25%. Chairman Adrian Orr stated that negative rates are not out of the question; however, it is highly unlikely and will not come till next year. (Also a partial reason as to why negative rates could not be implemented in the first place is due to banks’ computers not being able to handle negative rates)

ECB Monetary Policy Report – Thursday, 25th June

Similarly, to New Zealand’s Reserve Bank, the ECB has dedicated a sizable chunk to help the European economy recover from the Coronavirus. The Policy meeting hopes to discuss the future of the European economy, future monetary policy stance, and provide guidance on economic developments. This report will be fundamental in determining the mindset of the ECB, and what the future financial environment will be in the European Union.

US Initial Jobless Claims, US GDP Growth rate QoQ and US Core Price Index – 25th, 26th and 27th June

With Coronavirus cases increasing above their average in many states, the virus remains front in center for many Americans. With election season coming up, President Donald Trump has resorted to opening the states with regard to the rising cases. Peaceful racial protests continue to fuel the spread of the Coronavirus. The previous unemployment claims dropped to 1.52 million last week, showing signs of American citizens going back to work. Analysts predict that figure to drop to 1.508 Million unemployment claims. With the consumer being touted as the backbone of the American economy, hopes are on the consumer to provide that initial boost to the economy. Analysts predict a drop of the Core Price index to 0.9% year over year, down from 1%. Furthermore, analysts predict a -5% Quarter over Quarter growth rate.

Investors and traders need to be careful of sudden policy changes affecting their trades and investments in the week ahead. Here is your market recap over the weekend

Happy trading!

Euro Strength may be the Achilles heel for exports

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.

History of the Euro post Financial Crisis

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.

Balance of Trade of the Euro Zone over the past 20 years. You can see exports pick up around 2014

Euro Zone's GDP over the past 10 years

However, there has been a different tone from Lagarde, even before the Coronavirus pandemic.

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.  

ECB Interest rate

What is the future of the Euro?

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.