Is EURUSD the Next Asset to Crack?

Posted on

April 22, 2020
Brent cash lower by 11%
Equities up more than 1%
Nikkei -0.74% Dax 1.277%
UST 10Y 0.58%
Oil $11/bbl
Gold $1697/oz
BTCUSD $6945

Asia and the EU
No data

North America Open
CAD CPI 8:30

Markets were mixed in midweek trading with equities bid, oil continuing its slide, and FX flat as traders found no common themes today but remained optimistic about the further flattening of the curve of the coronavirus.

Although the rate of infection remains disturbingly high in Europe and North America, this week’s data suggests unequivocally that infection growth has peaked in key hotspots of the world as the draconian lockdown measures have clearly had their intended effect. Markets are now pricing in the prospect of mid-May as the partial return of economic activity and are beginning to discount that dynamic.

In the US the assured passage of the 2nd relief bill should also help ameliorate the economic damage caused by the lockdowns. The markets are clearly anticipating a rapid recovery and massive pent up demand but such enthusiasm is misplaced as the damage done by the virus and the lockdowns are much more likely to cause lasting economic pain and much more cautious return of demand than is currently priced in.

Nothing shows this better than the current situation in oil which continues to post multi-decade lows with Brent dropping to prices not seen since 1999. The toxic combination of lack of storage, a 30% decline in demand and the ongoing price war between Saudi’s and Russians has decimated the longs and while lower crude as an input is a short term positive, the complete collapse of the sector and the possibility of multiple bankruptcies as a result of the events of the past month is likely to create far more damage to the global economy than benefit.

In FX the price action was most muted of all with majors trading in tight 30 pip ranges for most of the night. The focus this week is on the Eurozone and the continued reluctance of Germany to create a unified fiscal response to the collapse of European economies. The stresses in the system are clearly building as evidenced by the widening of the spread between Italian and German bonds which is quickly approaching the 2.88% level reached at the start of March. FT reports that there is now enormous pressure on the ECB to come in as a buyer of last resort to the BTPs and stabilize the rates. Otherwise, the financial stresses on Italy could create the prospect of political fracture.

Markets will be laser-focused on tomorrow’s European Council meeting. Lack of progress and continued wrangling could open the floodgates for euro shorts as both economic and political situation on the continent remains highly fragile and EURUSD could be the next asset to crack.

Boris Schlossberg
Managing Director

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