As the Euro approaches a 7 week high I thought it important to qualify the recent rally in the single currency. It is surging across the board largely due to the integration measures that it is being seen to be considering. With Germany and France coming together last week to propose a half a trillion coronavirus support fund, the market is betting it will get the progress in the Euro area management that it has long desired. With most integration coming from the intergovernmental cooperation of France and Germany, the market is right to be optimistic about the recent developments. A quick word on what the progress looks like before we chuck cold water on the flames.
The proposal at present is for the European Commission to participate independently of nation states in global capital markets. It will then, subject to guidelines, be responsible to issue a series of loans and grants to ailing Eurozone members. For the first time in history a European Institution outside of a monetary authority will be able to raise money on its own with the backing of the monetary union for fiscal purposes. Okay so now for the downside: whilst states including Italy and Spain and much of the periphery are onboard, Austria and the Netherlands are staunchly against the program. These members threaten to preclude grants (that don’t necessitate repayment), in favour of loans. Universal accord is required to pass this initiative given the voting structure in the European Council and markets would be well reminded of the failed integration efforts of Macron and Merkel in 2017.
The Phoenix I’m sure will arise from the ashes and a mechanism for risk sharing be created but it is unlikely we see it in time for Coronavirus. The European project has always advanced in response to an external threat; its very foundations lie in a bilateral response to the Second World War. Having said that, it could well be too early to bet your bottom Dollar on Eurozone progress.
Forgot your password? I wish! Sadly the president appears to have “remember me” ticked as he slides onto Twitter once again the take aim at China. Did you know that Trump has recently broken his own record for the number of daily tweets since his term began? One fateful day in January Trump racked up a thumb-numbing 142 tweets in a single day. Sadly in lockdown the President appears to have a little more time for wreaking havoc on global markets with his online musings given he hasn’t got a golf club in his hand.
While the UK was sleeping last night the President has accused China of being “on a massive disinformation campaign” and failing in their management of the Coronavirus outbreak. The “incompetence of China” the President claimed, is the cause of the pandemic we have today. The President’s words injected further uncertainty in US-China trade prospects which damaged risk sentiment particularly heavily given the important role that Trans-Pacific trade will inevitably play in global economic normalisation. The news created a sharp rise in defensive Dollar demand to the detriment of the Euro.
EURUSD will continue to ebb lower whilst risk remains fragile. In a presidential election year expect the incumbent to cause controversy in public spheres to draw attention away from the leadership debate. Given how far off integration in the Eurozone could prove to be and how immediately risk sentiment can change, the Dollar should stay well bid against the Euro for some time. Once the realisation of tangible progress in the Eurozone integration project comes, the current account surplus that has survived in the Eurozone and improving economic conditions will provide the Euro its time to rally.
Discussion and Analysis by Charles Porter