Daily FX Market Roundup 02.13.20
By Kathy Lien, Managing Director Of FX Strategy For BK Asset Management
Everyone wants to know how much further the euro can fall.Not only has it been in a downtrend since the beginning of the month, but it lost value 8 out of the last 9 trading days and on the one day that it rallied, the increase was modest at best. Investors have beaten the currency down to its lowest level since April 2017. In order to gauge how much further the pair can fall, we have to understand why it's losing value as quickly as we’ve seen.
6 Reasons For Euro’s Decline
We can identify at least six reasons for EUR/USD’s decline and they mostly have to do with divergence between the EZ and U.S. economies
- ECB defends the need for low rates and teases the possibility of more stimulus. Whereas the Fed is comfortable maintaining steady policy.
- Eurozone data takes a turn for the worse with EZ industrial production tumbling sharply.
- Concerns that Friday’s GE and EZ Q4 growth will be weak while U.S. retail sales could be strong.
- The EZ economy is more manufacturing-driven and therefore more vulnerable to Chinese slowdown than the U.S.
- Low interest rates makes euro an attractive funding currency.
- Whereas dollar catches safe-haven bid as coronavirus intensifies.
Since data will most likely show the divergence between the eurozone and U.S. economies widening in the coming weeks, further losses are likely. The next major support level for EUR/USD is 1.05 but the decline could also ease around 1.0800, an area that contained losses in early 2016 and mid 2015.
When it comes to trading, fighting trends can be futile. When the euro bottoms, the turn will be meaningful so for the time being it's better to go with the trend than to fade it. The spike in coronavirus cases doesn’t help. Euro is a high-beta currency that suffers when there is risk aversion.
In fact, all of the major currencies traded lower on Thursday on the back of the coronavirus news. Positive comments from the Reserve Bank of New Zealand and the Bank of Canada failed to prevent losses in either currency. However when push comes to shove, we expect NZD and CAD to outperform their peers as those central banks downplay the virus’ impact. It should also be only a matter of time before USD/JPY sees more losses. The greenback is catching a safe-haven bid but 110 is proving to be stiff resistance. If equities continue to slide and Treasury yields follow, we should see a move below 109.50 fairly quickly.
Last but certainly not least, sterling went on a rollercoaster ride following the resignation of finance minister Sajid Javid. The announcement came as a surprise and was a protest against Prime Minister Johnson’s staff changes. GBP/USD plunged below 1.29 in response but recovered after he was quickly replaced by Rishi Sunak, a son-in-law of a billionaire with extensive financial market experience. Sunak is also seen as a rising star in the Conservative Party. Sterling rallied on the hope that the new chancellor will loosen the purse strings and provide a more expansive budget. He’s long supported lower taxes and more infrastructure spending.