Despite bearish indicators, the currency market remains defiant

The contrast couldn’t be more striking. Though negative indicators on both the economic and public health fronts continue to pile up, the currency market is experiencing limited volatility, with the euro even showing a slight increase against its main rivals last week (up 20% against the US dollar, 40% against the Japanese yen and 60% against the Canadian dollar).

If we take a moment to analyse the performance of the main currency pairs in the market last week, the fluctuation ranges were decidedly marginal. This reflects limited marketplace volatility, which, though not unusual for the summer period, may come as a surprise given prevailing economic conditions. With that in mind, the euro versus the US dollar (EUR/USD), the euro versus the Swiss franc (EUR/CHF) and the euro versus the pound sterling (EUR/GBP) all fluctuated within a range of 100 points, which is minimal to say the least.

Meanwhile, the health crisis continues to intensify across the globe, and in some US states the pandemic is now completely out of control. Last Thursday, Texas surpassed its previous daily record for new cases diagnosed, and Florida’s Disney World is finding itself under increasing pressure to postpone its reopening date, which remains set for 11 July. Internationally, a return to normal seems to be a distant prospect as far as public health matters are concerned.

From an economic standpoint, last week was also noteworthy due to the warning issued by the International Monetary Fund (IMF) regarding Covid-19’s impact. The international organisation revised its previous forecasts, dating back to April of this year, and downgraded growth projections for the majority of countries across the globe. The total economic cost of the current crisis is now predicted to reach 12 trillion dollars for the 2020-21 period, versus an initial estimate of 9 trillion dollars. This baseline scenario is dependent on a V-shaped recovery worldwide as of next year, but a host of factors will bear an influence on this. Among these, whether not we will experience a second wave of the Covid-19 pandemic in the second half of this year, and whether or not the monetary and budgetary policy decisions made to tackle the crisis will ultimately prove effective. Beyond that, pure luck will also be a factor.

For France, the IMF reduced its previous growth forecast, seeing the figures deteriorate from -7.2% to -12.5%. The French economy is among those expected to experience one of the harsher recessions this year. That said, we find this outlook to be somewhat pessimistic given the latest indicators published, such as the PMI and business climate index, not to mention the French national statistics office’s (INSEE) improved GDP growth forecast for Q2 of this year, which has seen estimations rise from -20% to -17%. Recent measures taken by the French government, such as the extension of the short-time working scheme, must also be taken into account. In our view, France’s recession for this year is more likely to hover around the -11% mark, which, all things considered, is certainly no cause for celebration.

Ultimately, it is useful to bear in mind that, although the currency market has not exhibited volatility over the last week, this does not suggest that such volatility will not return in the weeks to follow. We should remain mindful that the July and August periods are usually conducive to dramatic declines in the financial markets. As we highlight here, as well as in previous blog posts over the past few weeks, the number of potentially destabilising factors is considerable. We should remain especially watchful of a possible renewal in trade tensions fomented by the Trump administration, which could result in greater risk aversion and negatively impact the euro. Debilitated in many ways, including polls that put it at a loss and an economy at risk of deflation, the current US administration has announced that it is considering the implementation of additional customs tariffs on 3.1 billion dollars’ worth of imported European goods, with French imports being no exception. Similar measures are being considered for imports from other countries, including Canada. A trade dispute that would see both sides of the Atlantic go head to head this summer, with volumes at their lowest, simply cannot be excluded. Against this backdrop, rolling out hedging strategies to protect from margin erosion seems all the more important.