- EUR/USD snaps long-term trend in worst week since 2010.
- EUR snaps 35-year uptrend with weekly close below 1.0782.
- Trend break puts a possible move down to 1.0352 in pipeline.
- Little standing in way of EUR/USD parity once beyond 1.0352.
- Trend break comes after positioning turns neutral from short.
- Positioning shift sees EUR rediscover fallibility after 6% rally.
- But coronavirus spread slows as German fiscal support looms.
- Germany to loosen purse strings, spend 600bn to aid economy.
- European fiscal measures could support EUR/USD this week.
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- EUR/USD Spot rate: 1.0679, -3.67% last week
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The Euro-to-Dollar rate closed its worst week since May 2010 on Friday and snapped a 35-year uptrend in the process, leaving it vulnerable to further declines over the coming days and at risk of a slide toward parity in the weeks and months ahead.
Europe's single currency fell nearly 4% last week after investors positioning shifted from 'short' to neutral in the prior week, leading the Euro to rediscover a fallibility that was absent through much of February and early March when the continent's unified unit rallied 6% against the greenback. The Euro rose in previous weeks because investors were forced to buy it back after having borrowed and then sold the low-yielding single currency to fund wagers on higher yielding assets elsewhere.
The recent coronavirus-induced exodus from emerging market currencies and many other risk assets was enough to lift the Euro sharply this last month but the unwinding of the earlier 'shorts' against it and resulting neutral position of investors has effectively pulled the rug out from under it. And with investors scrambling to sell everything that wasn't a U.S. Dollar last week, the Euro has succumbed to the same fate seen by all other major currencies of late. And now it risks even further downside.
"EUR/USD has the 35 year uptrend at 1.0782/74 in its sights. This is major support and it is has been broken. We will require a close below here on a weekly basis (today) to confirm a break. Failure here would be considered to be a major break down and would target 1.0352, the 2016 low, on the way to 1.0000," warns Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank in a Friday research note.
Europe's single currency closed below the 1.0782 level Friday, which coincides with a 35-year long upward sloping trendline and Jones says it now needs to recover the that level to avoid risking a brush with parity against the Dollar. It was helped along by a whopping €750 billion European Central Bank (ECB) increase to its already-once expanded quantitative easing program, which has hampered an unwelcome surge in Eurozone government bond yields.
Above: Euro-to-Dollar rate shown at daily intervals with 35-year trendline marked out.
"With the UST rally slowing in pace and those short-term carry positions likely washed out it’s now. With that flow risk dealt with, EUR is more likely to follow its macro and credit risk path instead," says Jordan Rochester, a strategist at Nomura. "We were surprised by the level of long EUR positioning remaining in real money space. The break below 1.08, the roll out of lock downs in Europe and much more aggressive ECB QE might change that narrative. It’s why we will add to our existing EUR/USD short."
With three of Europe's largest economies in 'lockdown' to avoid overwhelming health services and such draconian measures now being contemplated in the UK, U.S. and other countries, investors are fearing for the future of the global economy and have sold just about every financial asset going as result. And the only thing that appears to have gotten a look-in is the U.S. Dollar and some parts of the American bond market.
That's put pressure on the Euro-to-Dollar rate and many are wagering that the single currency falls further in the weeks and months ahead, while few seem willing to bet against the mighty U.S. Dollar that's risen sharply against just about every other currency out there recently. However, the early days of the new week could offer the Euro some respite from last week's selling pressures and an opportunity to recover the 1.0782 level that's necessary to avoid a descent toward parity.
"Germany looks set to formally activate the emergency clause of its constitutional debt brake this week," says Hoger Schmieding, chief economist at Berenberg. "According to various media reports, Berlin’s fiscal response to the crisis could add up to well above €600bn under various guises."
German Finance Minister Olaf Scholz is set to do away with the 'black zero' balanced budget rule this week, according to multiple reports, and unveil a €600 (£550bn) package of measures aimed at supporting the economy through the world's fifth largest coronavirus outbreak. The package is expected to be approved by the cabinet of Chancellor Angela Merkel on Monday and could be rewarded by the market because, unlike in the UK and other countries, Germany has both a budget and current account surplus and so can borrow large sums without necessarily imperilling its balance sheet.
Above: Euro-to-Dollar rate shown at weekly intervals with 35-year trendline marked out.
"Germany will find it comparatively easy to fund these measures. Let us hope that, as part of solidarity within Europe, Germany also endorses unconventional measures at the EU/Eurozone level which would make it easier for weaker countries to fund similar steps," Schmieding says.
Expectations of a German stimulus have mounted after Chancellor Merkel said Wednesday that she’s open to using “joint debt issuance” in order to combat the economic fallout of the virus, a past objection to which has long prolonged if-not prevented the deleveraging and reflation of the indebted ‘periphery’ Eurozone countries that have weighed so heavily on the bloc’s economic performance since the debt crisis of 2011/12. Any decision to go ahead with "joint debt issuance," whether intended as such or not, might sow the seeds of a long-term recovery for both the economy and the single currency.
The Euro and European financial markets will wake Monday not only to news of a large German stimulus but also to reports of the first widespread fall in the number of new coronavirus cases confirmed over the weekend. Some say that could be the first sign of a so-called 'peak' in the epidemic, although more data is needed to confirm it. Coronavirus has brought economies to a standstill, put life on hold for everybody and tested the limits of policymakers' crisis fighting toolboxes so all currencies other than the U.S. Dollar would be likely to welcome signs of a peak no matter how small or tentative.
"The latest daily data from Europe show that the rate of increase of new Covid-19 cases slowed markedly everywhere over the past day, compared to the recent trend. This is not definitive evidence of anything,," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "If these numbers are correct, though, and are sustained and then confirmed by the deaths data, they will mark the beginning of the turning point in Europe's battle against the virus."
There is a range of economic figures due out in the week ahead including the monthly IHS Markit PMI surveys and the German Ifo business sentiment index, although all of these matter little now in light of the damage being done to the continental economies by the coronavirus and efforts to contain it. What matters most to markets at present is the pace at which coronavirus is spreading and the actions taken by policymakers to contain it and to support their economies.
Above: Euro-to-Dollar rate shown at monthly intervals with 35-year trendline marked out.
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