mother putting a face mask on her daughter

In our FX review this week, we consider whether the rising risks of lockdown in Europe should make the EUR weaker, or if it’s already been hit enough in recent weeks. We also take a look at souring risk sentiment towards the end of the week and how this continues to favour USD longs.

Y-EUR not going to like this

The main news out last week was fresh concern in Europe around Covid-19. Austria announced a new nationwide lockdown starting Monday. In Germany, the finance minister said that he couldn’t rule out another lockdown for the country. Even here in the UK, case numbers remain high.

This has been a millstone around the neck of the EURO, which struggled for the whole week against peers. In recent weeks, the reason for weakness has been driven by it’s use as a funding currency. We’ve spoken about this many times before, but essentially it’s one of the cheapest currencies to borrow, given the negative interest rates. From this, investors can then go off and buy a higher yielding currency, such as USD.

With the Fed starting to taper off asset purchases, combined with a large inflation print the previous week, many have been buying USD. Selling EUR has been the favorite funding currency, pulling EUR/USD lower to fresh lows of the year.

So with news towards the end of the week of European lockdown chatter, it added another reason to sell EUR. EUR/USD headed into the 1.12’s, with EUR/CHF breaking below 1.05. EUR/GBP managed to hold ground better, as the 0.8400 level acts as a good barrier.

Risk takes a wobble

Risk sentiment took a knock towards the end of the week as well. European lockdowns was a reason, but also it was a ripple effect through other markets as equities headed lower. For example, the Dow Jones index closed 0.75% down on Friday. Concerns over China were cited on this.

Although this left the end of the week in a worse place than where it started, we aren’t overly concerned about recent developments. Therefore, we like buying the dips where we see them. Given our bullish USD view, we don’t see value in getting long EUR/USD. However, we do like being long EUR/CHF. 

The SNB are likely aware of EUR/CHF moving lower and should start to intervene given their track record in this regard. Further, you could make an argument that markets have pushed the EURO to an oversold territory after several weeks of losses, which would support a tactical rebound.

Next week, we have the RBNZ meeting where it looks likely the central bank will raise interest rates. On Wednesday we have US GDP, and on Friday we get Swiss GDP (important for our EUR/CHF position).

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