A fragile calm returns to the currency market

21 April 2020

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No intervention from central banks last week

This is the first week since the COVID-19 crisis broke out in which the central banks of the world's major economies have not intervened. This is not a sign that the economic situation is improving, but rather that financial markets – including the foreign exchange market – are adapting to the new reality regarding the coronavirus and the cumulative effect of economic bad news.

A currency market dominated by technical movements

We are facing a currency market dominated by technical movements, which reacts little to statistics. There is still a high degree of volatility in emerging currencies (such as the Mexican peso and the South African rand), but much less now for the major currency pairs. Over the past week, the EUR/USD rate has moved within a range of around 170 points while the EUR/GBP rate has remained relatively stable within a range of 100 points. Unsurprisingly, EUR/CHF remains close to the 1.05 threshold, thanks to the interventions of the Swiss National Bank, which has spent around 7 billion francs in the first week of April to maintain this level.

 The return of much better-contained levels of volatility for the major currencies confirms that the market is now managing to avoid panic, and that the massive injections of liquidity from the central banks, which are continuing as we write, have resulted in a temporary calm. It is temporary because economic uncertainty remains high, and many questions remain in terms of future developments in the health crisis. It is not out of the question that a second or third wave, of the kind being seen in a number of Asian countries (with the introduction of a new lockdown in Singapore), will result in further closures of developing country economies.

It is a little early to draw any firm economic conclusions from the situation. However, the International Monetary Fund has made some first attempts in the last week, and initial results are very instructive. According to IMF projections, the world economy could experience its worst recession since the Great Depression, with a contraction of as much as -3% this year. In the United States, the recession is anticipated to be -5.9%, and -7.5% in the European Union. Only two countries are expected to finish the current year with positive GDP growth: India and China, with +1.9% and +1.2% respectively. The most striking prediction is that Asia – normally the engine of world growth – is anticipated to post zero growth in 2020 for the first time in sixty years. Assuming the epidemic does not return in the autumn, and that appropriate monetary and budgetary policies are implemented, world growth could recover by +5.8% in 2021, according to the IMF.

Low volatility in currencies expected this week

The week ahead is expected to be further marked by low volatility in currencies, given that no major economic or health shocks are expected following the events of last week. The EUR/USD pair is expected to remain within its long-term range of 1.07 to 1.12, which has almost continuously been the prevailing range since summer 2019. In the short term, consolidation should be between the support at 1.0702 and the resistance at 1.1071. These levels have remained exactly the same for two weeks. Similarly, very few movements are expected for the EUR/CHF pair, which remains well anchored at around 1.05. The underlying downwards trend on EUR/JPY should continue, with an imminent return towards the low points of 2016 and the 115 area.
Lastly, the long-awaited rebound of the Canadian dollar against the euro is on hold for now in the absence of a sustainable rise in oil prices. The last five trading sessions saw a decline in Brent by nearly 7%, and in WTI by more than 10%. The oversupply in the oil market should, at best, be partially reduced only by late April or early May, following OPEC's recent agreement to lower production. Only then will a Canadian currency recovery look possible.

Key dates this coming week:
  • 21/04 - EUR - German ZEW Economic Sentiment Index
  • 23/04 - EUR - PMI manufacturing index for Germany
  • 23/04 - EUR - European Council, which is to approve the support measures taken by the Eurogroup and discuss a co-ordinated recovery plan which could lead to debt mutualisation
  • 24/04 - EUR - IFO Index for Germany

This article is not intended as professional investment advice.

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