The euro registered very strong growth against the US dollar in June, in conjunction with a fall in risk aversion on the foreign exchange market and improvements on the public health front in Europe. This was in stark contrast to the spread of the pandemic on the other side of the Atlantic. The two central banks – the Fed and the ECB – are on autopilot, and have repeatedly underlined their commitment to ensuring market liquidity over the coming months. We are not expecting anything from the Federal Reserve meeting scheduled for 29 July. The spectre of a resurgence in risk aversion still hangs over the market. According to Bloomberg, the White House may be tempted to spark another trade war, not with China but with Europe. The Trump administration is said to be considering the possibility of imposing prohibitive import duties on almost US$3.1 billion of exports from France, Germany, Spain and the United Kingdom. The return of the trade war is surely inevitable given the economic situation in the US. The dollar index is too high, the US economy is struggling to overcome the crisis, and a clear risk of deflation is emerging. Against this backdrop, the euro weakening once again is highly likely.
Improved clarity as to the Brexit roadmap benefited the single currency in June, with a month-on-month growth of 1.08%. As expected, the UK government did not ask for an additional extension to the transition period. In concrete terms, this means that Brussels and London have six months to reach and sign an agreement before the UK leaves the EU. We are sceptical as to their ability to overcome this challenge. However, we believe that the euro shouldn’t suffer from any negotiation-related issues. Traders are fully aware that it will be the UK, and in turn the British currency, that will be most affected by Brexit.
The main barometer of EUR/JPY exchange rate developments is risk aversion. With this substantially reducing in June, it is not surprising that the euro has regained ground (+2.5% month on month). Several factors have favoured the euro. Among these, lockdown restrictions having eased more or less globally, allowing for a semblance of an upturn in economic activity even if we are still far from pre-crisis levels. Another factor has been the maintenance of central bank liquidity, thanks to massive intervention by the Fed, the ECB and the Bank of Japan, which has reassured investors. Last, but not least, a period of relative calm on the geopolitical front has also been a factor. Tensions between China and the USA have lessened in the past few weeks, and it seems the occasional blips between China and India have not affected movements in the FX markets.
The EUR/CHF pair was highly volatile in June, with a surge up to the region of 1.09, reflecting, among other things, a position adjustment by traders. The Swiss National Bank (SNB) has not amended its monetary policy in recent times, and has left its policy rate unchanged in light of uncertainty impacting growth in the Swiss Confederation. However, the message is clear. The Swiss franc continues to be overvalued in comparison to the euro, and the central bank is ready to intervene in exchange markets on a massive scale once again if the strategic threshold of 1.05 for the pair looks to be jeopardised. To date, direct intervention in the FX market remains the SNB’s preferred tool for implementing monetary policy. As the summer may be favourable to a return to high foreign exchange volatility against a backdrop of low market activity, we cannot exclude the possibility of SNB intervention becoming more pronounced over the coming weeks. For the moment, the threshold of 1.05 remains an impenetrable lower barrier.
There was ultimately very little change for the EUR/CAD pair over the past month, with fluctuation occurring over a range of around 300 points. On both sides of the Atlantic, central banks are on autopilot. In addition, the sharp increase in oil prices in June did not offer any real support to the Canadian dollar. It seems that traders were already aware that the brunt of this year’s rise in oil prices is already behind us. The prospects for an oil market recovery in 2020 are bleak, with economic difficulties likely to lead to low demand. There are no differentiating factors in the short term that allow us to predict an emergence from the range of 1.5130 to 1.5450, in which the pair has been trading since the beginning of April.
Economic calendar
| DATE | CURRENCY | EVENT |
|---|---|---|
| 1 July | USD |
ADP Nonfarm Employment Change Report for June |
| 2 July | USD |
US jobs report for June |
| 6 July | USD | Non-Manufacturing PMI Index for June |
| 14 July | EUR |
German ZEW Economic Sentiment Index for July |
| 17-18 July | EUR |
Physical European Council meeting in Brussels to discuss the coordinated recovery plan and multiannual financial framework |
| 29 July | USD |
Meeting of the US Federal Reserve |