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The Euro's V-Shaped Recovery

By Kathy LienForexMay 23, 2019 05:18PM ET
www.investing.com/analysis/what-triggered-the-euros-vshaped-recovery-200424561
The Euro's V-Shaped Recovery
By Kathy Lien   |  May 23, 2019 05:18PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup May 23, 2019

For the lack of major US economic reports, it was a very active day in the forex market. The greenback, which traded well against euro, Australian dollar and other currencies prior to the NY open u-turned and ended the day lower against all of the major currencies. USD/JPY was hit the hardest by trade war fears, risk aversion and weaker new home sales. Although stocks initially shrugged off the deterioration in Sino-US relations, investors are finally recognizing the potential impact of a prolonged trade war. With Chinese President Xi warning about a “new long March and “self-reliance,” there will be no quick solutions. By evoking a term that relates to Mao Zedong’s strategic retreat in 1934, China is saying they will not back down easily and are prepared to make the sacrifices needed to preserve their industries for the years ahead. If China refuses to cooperate, President Trump could push for new tariffs on USD$300B of Chinese goods. The US may not be as intensely affected as other parts of the world, but there’s no doubt that US companies and consumers will feel the pain through higher prices and lower demand. Wall Street is finally recognizing the strong possibility of weaker earnings in the second half of the year so USD/JPY, which has broken below 110, could fall below 109.

Euro on the other hand ended the day higher after dropping to a fresh monthly low against the US dollar. This is a dramatic recovery fueled by pressure on the US dollar and profit taking right at the April lows. The latest economic reports were weaker than expected with service and manufacturing slowing in Germany and the Eurozone. The German IFO report also declined with the business climate index falling to its lowest level since 2014. The trade war weighed heavily on business sentiment and according to IFO President Fuest, “there is reason to worry, particularly about the manufacturing index.” Markit Economics also noted “subdued business growth amid stagnant demand.” The euro fell in response but liquidation of US dollars reversed the slide during the NY session. Meanwhile European elections are underway across the region with results expected over the weekend.

Sterling also recovered its losses after falling to 1.26. House leader Andrea Leadsom’s resignation increases the pressure on Prime Minister May to resign and some expect that it could happen within the week. We think the writing is on the wall and she’ll be forced to step down before Parliament accepts the Withdrawal agreement. UK retail sales numbers are scheduled for release tomorrow and given the increase in spending reported by the British Retail Consortium, a good number is possible. If spending rises more than expected, it could trigger an aggressive short squeeze in the deeply oversold currency.

The Canadian dollar seems to be completely unfazed by good data. Wholesale sales rose sharply in the month of March, mirroring the rise in retail sales yet instead of resuming its slide USD/CAD extended higher on the back of lower oil prices. The moves in crude have been brutal – it dropped nearly 6% today, which was the worst one day loss in 6 months. Now that prices have fallen below $60 a barrel, we could see further losses if risk aversion and trade war concerns escalate. The Australian and New Zealand dollars on the other hand rebounded. New Zealand trade numbers are due for release this evening. A smaller surplus is expected after last month’s strong rise.

The Euro's V-Shaped Recovery
 
The Euro's V-Shaped Recovery

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Brian Rawling
Brian Rawling May 24, 2019 2:58AM ET
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Good day,You refer to the (very small) declines in EEC PMI's contributing to euro weakness but not the (sizeable) declines in USA PMI's affecting the USD. Is there a reason why not?
YK KOH
YK KOH May 23, 2019 11:51PM ET
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Thanks
Partap Singh
Partap Singh May 23, 2019 10:16PM ET
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thank you Kathy
brad merck
brad merck May 23, 2019 6:20PM ET
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Is more difficult Say manipulation
Agiel Duhaney
Gilles94 May 23, 2019 6:05PM ET
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The  USD/CAD  pair  started  was  strengthening  before  oil  lost  6% of  market ( ? ). Additionally,  the  US economy  still  is  resilient amid  the  trade war  so  the  USD/JPY   might  still   move  in  the  direction.of a stronger  USD.  Additionally,  the  Yen  will  suffer   from the  trade  war.  ..Thanks  Kahty     i
 
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