Three questions to understand what’s happening on the forex market

30 March 2020

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Why did the EUR/USD increase last week?

The euro strengthened substantially last week against the safe-haven currencies, essentially the US dollar and the Japanese yen. This appreciation followed several weeks of decline, and has not totally wiped out the losses that have been piling up since the year began, because since January, the euro has still been down by nearly 1.8% against the dollar.

Last week’s upward trend reflects dwindling risk aversion in connection with the central banks’ combined efforts worldwide to stem the crisis. The liquidity volumes injected by the US Federal Reserve, the Bank of Japan, the European Central Bank, the Bank of England, and eleven other central banks have contained the panic - at least for now. Up to this point, the flow of bad statistics, which could last several months, does not seem to have had a negative effect on the euro. Proof of that came last Thursday when, after the disastrous figure on jobless claims in the United States was published (more than three million in the space of one week!), the euro had its best trading of the week against the dollar.

For the moment, the euro is immune to the bad numbers, but there is no guarantee this will last. The various forecasts laid out over the last two weeks stress that the economic shock will be massive in Europe, with the service sector collapsing and unemployment on the rise, and that the recovery will be very gradual.

What should we expect this week to bring?

The central banks should step back this week, after using up a large part of their arsenal. The Bank of Canada was the last major central bank to announce a sovereign debt buyback programme last Friday amounting to five billion CAD per week until the economy is back in gear. This programme involves all maturities of sovereign debt in Canada.

In addition, Japan must finalise its fiscal stimulus plan for the budget debates in Parliament set to begin this week. As various sources have it, the plan will include a wide range of measures, including a direct cash distribution to households (a fiscal airlift of sorts) and aid to businesses, for an amount that could be close to 30,000 million yen (twice as much as the budget package activated to deal with the 2007-08 financial crisis).

In Europe, discussions will continue with the Finance Ministers (in the Eurogroup) to try to reach a consensus and set a coordinated fiscal response in motion. As in 2012, during the European sovereign crisis, the Northern European countries (Germany, Netherlands, Finland, and Austria) are facing off against the Southern (France, Italy, and Spain) over the need for new support measures. The debates will last at least two weeks, so there is nothing to expect this week from Europe.

The most important indicator to watch in the coming days will be the American jobs report (also known as the NFP, non-farm payroll), which will be published Friday at 1:30 p.m. Paris time. Going by the preliminary data by State, net job losses in March caused by COVID-19 and confinement measures could climb as high as five to seven million, which would bring the unemployment rate close to 8%-9% from its 3.5% in February. Clearly, so meteoric a rise over so short a time span is unheard of in peacetime. The forex market has already priced this bad news, because the Treasury Secretary warned that second-quarter unemployment could soar as high as 20%. This means the euro could stand its ground against the US dollar, but not without a great deal of volatility, at a minimum.

What are the technical levels to watch on the EUR/USD?

For two weeks now, the euro has experienced volatility unlike anything it has encountered in several years. The range of fluctuations in the EUR/USD pair since 16 March is on the order of 400 points, which is unusual even in normal times. Conversely, volatility is less intense in the other euro pairings, such as EUR/CHF or EUR/GBP. The single currency began to rise last week, reaching up into the 1.09 zone as risk aversion dipped. However, the bearish bias on the pair is intact. It continues to trend below its 200-day moving average and, as we said above, there is no guarantee that the euro can hold out much longer against the growing stack of bad statistics. We think a return to 1.08 is likely in the weeks to come.

This article is not intended as professional investment advice.