Morning Brief – Eurovision

Thu 13 Feb 2020



Resistance, support, reversal and jargon. Is pretty much what you’ll receive if you try and research the Euro’s sell-off since December 2019. If you try and read a forecast about what is going to happen to the Euro from here you’ll find even more nonsense. Here’s the truth of the matter:


The Euro yesterday evening hit its lowest value versus the US Dollar since 2017 and its weakest level versus the Swiss Franc since 2016. Although only a two (and a bit) and three (and a bit) year high respectively, the surge is important because the 2017 low on EURUSD is close to the all-time low and sufficiently weak to start discussions about parity: 1 Euro equals 1 USD and vice-versa. The immediate path of EURUSD should be uncertain. The reason is that the market has traded and turned at the price it is at today so many times that so many interests and expectations have built up around these levels. Accordingly, traded volumes should be elevated as market participants position themselves around what they think could be the next turning point.


There are three factors for the Euro’s weakness. The first two, economic in nature, are the Euro’s role in markets today and, secondly, the bloc’s economic fundamentals. With bafflingly low rates and thus yields the Euro has taken on the role of the funding currency. This means it’s the one you’re going to sell when you’re looking to buying something else to pick up a bit of real yield and interest. Sure, to take profit you’ll have to buy Euros back eventually but with futures markets telling us that interest rate expectations are still pointing towards a cut this year, it could be an incredibly long time until you have to buy them back.


Secondly, with industrial activity waning in Germany and the wider Eurozone, the threat of the coronavirus to global demand for Eurozone exports is undermining growth expectations further. Overnight the new cases of coronavirus have registered at 14,800 in a single day. It’s too early to tell whether the change in counting methodology is to blame or the reinvigoration of risk appetite yesterday driven by expectations of peak virus transmission were misplaced.


The final threat pushing the Euro lower is political. With the resignation of CDU leader Annegret Kramp-Karrenbauer announced this week, the successor to Chancellor Angela Merkel is now uncertain. In addition the development of the far-right in German politics is undermining the perception of German political economic stability.


To reflect Euro fragility, JP Morgan, RBC and Credit Agricole have immediately downgraded their forecasts for the Euro. The median forecast for 2020 year-end amongst analysts when last observed was 1.14, pie in the sky territory from where Europe opens trade this morning. The market will provide interesting enough conditions on its own at this all too familiar level but external stimulus will come from Germany tomorrow morning as we learn more about Q4 growth in the EU’s largest economy. The median forecast is for a 0.1% quarterly expansion. But approximately 30% of analysts surveyed predict a contraction for Q4. The release is scheduled for 7AM tomorrow morning. If the statistics realise a contraction then recession expectations will be back in full focus and the Euro will sink lower.




Discussion and Analysis by Charles Porter

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