Monex: Euro blijft aansterken maar rally is fragiel

February 27, 2020

Hieronder volgt een commentaar in het Engels van Ranko Berich, Head of Research bij Monex Europe op de koersbewegingen van de euro, het Britse pond en de Amerikaanse dollar.

EUR

The euro rally continues marking this morning as the 6th consecutive day reaching fresh highs against the dollar. As the euro has also strengthened in several other currency pairs, this may initially be perceived as euro strength, but the opposite seems more likely. In the race to the bottom following from the coronavirus shock, it is not a matter of strength but rather one of weakness, where Sterling and the US dollar have performed worse over the past days compared to the euro. Expectations for the virus outbreak to be contained quickly are becoming less convincing, with the number of new daily coronavirus cases reported in countries outside of China exceeded those within the country. The open eurozone economy may get hit harder by the virus than the US, suggesting that the EURUSD rally could prove fragile.

USD

The dollar continued to firm throughout yesterday’s session as coronavirus fears weighed on markets for yet another day. The greenback’s fortunes have been reversed somewhat in this morning’s trading session, however, with euro and SEK leading the line in the G10 rally. Overnight, markets have priced in higher expectations of a rate cut by the Federal Reserve in March, with the implied probability sitting above 40% in both futures and swap markets. The equity market free-fall has likely emboldened dovish expectations, weighing on the dollar as yields fall, as futures markets point to a further slump in both the DJIA and S&P 500 index once US markets open later this afternoon. Befitting with the risk-off mood sweeping markets, the US 10-year Treasury yield continues to plumb fresh lows, now sitting at a record 1.29% as haven flows into safer government assets continue. Donald Trump’s attempt to soothe markets this morning hasn’t had the impact maybe he was expecting, but headlines showing the President continues to lambast the Fed not lowering rates only fuels market speculation. Last night, former governor of Indiana and current Vice President Mike Pence was appointed as the lead figure in the US response to the coronavirus. Pence was the governor of Indiana back in 2014 when the first MERS case was diagnosed in the US.

GBP

Sterling has been left out of the rally that most G10 currencies have enjoyed against the dollar overnight, and as a result has weakened against the euro. A mild uptick in market perceptions of the risk of economic disruption due to no-deal Brexit risk (now referred by the Government to as an ‘Australia style trade deal’) was the most probable driver of the underperformance. The Government’s mandate for EU trade talks, which will be published this morning, reportedly insists that Britain will have full control over its own rules in areas such as state aid, labour laws, and environmental standards. The paper will be presented and discussed in the House of Commons late this morning. This has been interpreted by some in Brussels as a breach of commitments made in the political declaration accompanying last years withdrawal agreement to ‘robust commitments to ensure a level playing field’. UK Government sources have in turn said this declaration only contained ‘aspirations and priorities’ as opposed to binding commitments. Elsewhere, the risk of economic disruption due to a potential worsening in the coronavirus outbreak, and flooding, are in the headlines today.