Updated: Oct 27, 2020
It’s not been a good day for EUR. Amid Covid-19 concerns driven risk off market flows, EUR is the second worst G10 FX performer on the day (CAD is, somewhat surprisingly doing worse), with EURUSD having The fact that EUR would be one of today’s underperformers is not exactly surprising as this weekend’s news flow was dominated by negative developments regarding the outbreak and further lockdown measures in the Eurozone;
Both Italy and France reported record cases over the weekend; over 20k new cases were reported yesterday in Italy and over 50k in France, though French medical officials are reportedly estimating that there are currently over 100k new infections per day. Italian, Spanish and Belgium officials announced tighter lockdown restrictions over the weekend (restrictions on business and hospitality in Italy, a state of alarm in Spain with an overnight curfew, while Brussels has closed sporting & cultural facilities), while French officials are threatening further measures lie ahead. Unfortunately, the bad news is not just been coming from Europe; the US posted a record daily increase in infections over the weekend and China is struggling to contain a localised outbreak in Xinjiang.
The Covid-19 news has not all been bad; the Oxford Uni/Astrazeneca vaccine has reportedly triggered protective antibodies and T-cells in the elderly and the duo has resumed its vaccine trail in the US. Moreover, J&J’s recently halted trail is also reportedly set to resume soon.
Nonetheless, as the northern hemisphere heads into winter (people spend more time indoors and viruses spread more easily), it seems reasonable to expect that things are going to get worse before they get better regarding state of the global spread of the virus, with tighter economic restrictions set to follow. Thus, risks of a “W” shaped recovery, particularly in Europe, are rising.
Indeed, the final “bastion of Eurozone growth” Germany saw further evidence that its economic recovery is slowing in the form of downbeat October IFO Business Climate survey data this morning. The headline index slipped to 92.7 from last month’s 93.2. IFO Economists said that as Covid-19 infections have risen, so had “nervousness” in German economy.
IFO forecasts 2.1% growth in Q4 2020, although this growth forecast does not assume a second lockdown (which is fair, given German officials have said no to more lockdowns). IFO added that any closure of schools and day care centres would have a “massive impact on the economy” and that export expectations have deteriorated given rising infections in Europe.
Note; given all of the above negatives, rhetoric from the ECB is yet to take a decisively dovish turn. Hawks within the ECB have resolutely set themselves out against further ECB easing over recent weeks, but is time for them to face reality.
The Eurozone economy has already been in deflation for 2 months, and things aren’t going to get any better this side of Christmas.
The economy needs more help. EUR traders today seem to be more aggressively pricing in the possibility of a more aggressive dovish shift from the ECB this week.
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