Euro slides as investors fear third wave in Europe
The move lower in the euro that we have been anticipating during most of March so far began to reassert itself
again last week.
With virus cases rising and lockdowns either being extended or reintroduced in most of Europe’s major nations,
investors are growing increasingly pessimistic about the bloc’s near-term outlook. The US, on the other hand,
continues to administer vaccinations at a rapid pace and has already unwound virus restrictions to a meaningful
extent. This continues to be evident in a general divergence in economic data between the US and Euro Area,
which has sent the euro tumbling back below $1.18 for the first time since mid-November.
The dollar actually rallied against every other G10 currency last week and almost every emerging market one.
Among the worst performers in the EM universe were the Turkish lira, which has been pressured lower by the
removal of the head of the country’s central bank, and the Brazilian real, which is approaching fresh lows amid a
worrisome increase in virus deaths in Brazil.
Investors will have a number of macroeconomic data releases to digest this week, notably Eurozone inflation
(Wednesday), the latest business activity PMIs (Thursday) and Friday’s US nonfarm payrolls report. We expect
another strong headline number in the latter, which is likely to be the key market moving event in the foreign
exchange market this week.
The pound continued to outperform most of its major peers last week as investors remain encouraged by the
UK’s so far impressive vaccine rollout. The UK government has announced that vaccine supply is set to drop in
April, although we’ve so far seen no evidence of such a slowdown with daily vaccinations rising to new highs
last week. News that the Moderna jab looks likely to be made available in the UK in the second half of next
month has provided some additional encouragement. More than 30 million people in Britain have now
received at least one vaccine dose and there has, as of yet, been no sign that the reopening of schools has led
to either an increase in new cases or deaths caused by the virus.
Updated Q4 GDP could receive some attention on Wednesday, although this is expected to remain unrevised.
We expect sterling to once again be driven largely by the latest vaccination and covid numbers. EUR
A host of nations in the EU have reinforced tougher lockdown measures in the past few days as infection levels
tick upwards and the bloc’s vaccine rollout stalls. The big concern among experts has been the increased
dominance of the faster spreading strain of the virus, which is causing cases to increase at an exponential rate.
This has put the euro on course for its worst monthly performance versus the US dollar since mid-2019. While
we remain bullish on the common currency in the longer-term, the growing downside risks to the European
outlook suggests that further losses in the euro could be on the cards in the near-term before this uptrend
begins to materialise.
Inflation data on Wednesday and the revised manufacturing PMI for March on Thursday could shift the euro
this week. The preliminary estimate of the latter jumped to its highest ever level last week (62.4), although the
overall outlook for Q1 remains grim and the entering into a double-dip recessions continues to appear
US macroeconomic data out last week mostly fell short of expectations, although continued to show the
country’s economy far outpacing most of its major peers, particularly the Euro Area. Fourth quarter GDP data
was revised higher, with initial jobless claims falling to their lowest level over the entire pandemic period.
Personal spending dropped sharply, although this was overlooked by investors given the sharp increase in the
measure in January.
Friday’s nonfarm payrolls report will be the main event in the US this week. With virus restriction measures
continuing to be unwound across the US by the week, we think that another strong month of job creation in
March is on the cards. Economists’ are eyeing a sharp increase in net job creation to more than 600,000 and a
drop in the unemployment rate to just 6%, which would be its lowest level recorded since the pandemic began
Last week brought more stability in the franc after volatile trading at the turn of the month. The key event last
week, the SNB meeting, was marked by a change in tone from December. Despite its recent depreciation, the
franc was still described as ‘highly valued’ in the statement, but the bank eased its tone on interventions. The
SNB indicated that it would intervene ‘as necessary’, a shift from December when it mentioned that it was
willing to intervene ‘more strongly’. The bank also revised its conditional inflation forecast upwards, citing
higher oil prices and a weaker franc. It expects price growth of 0.2% in 2021 and 0.4% in 2022 (compared to
0% and 0.2% respectively in December), and pencils in further acceleration to 0.5% in 2023. Expectations
regarding GDP growth were left unchanged at 2.5-3% in 2021.
Contrary to the previous one, this week will bring a number of readings from Switzerland. Given that they are
the most timely, we’ll focus on sentiment and positioning data. When it comes to the latter, last week’s CFTC
numbers showed a further decrease in CHF net longs. As the global outlook improves, we are likely to see a
return to negative franc positioning in the next few weeks, which would be the first such occurrence in about a
year and would mark a return to the pre-pandemic norm.
The Australian dollar extended its decline last week as investors flocked into the greenback at the expense of
just about every other currency. The slightly bizarre decision to enforce a mere three-day lockdown in Brisbane
on Monday after seven virus cases were detected has dominated many of the headlines so far this week,
although the FX reaction has been limited, nor would we expect it to be otherwise. Encouragingly, new virus
cases continue to be extremely low in Australia and the country’s vaccine rollout is picking up speed. The pace
of vaccinations has roughly doubled in Australia in the past week to 0.15 per 100 people per day – for context
it took the EU twice as long to reach the same pace.
A handful of economic data releases out this week could shift AUD. We will be paying particular close attention
to Thursday’s retail sales and trade numbers for February.
Aside from the US dollar, CAD was the best performer in the G10 last week and retains its mantle as the best
performing major currency so far in 2021. The move higher witnessed in oil prices so far this year continues to
provide good support for the currency, as is the steady expansion in the size of the country’s vaccine rollout,
which has finally begun to kick into gear in the past month. The number of those receiving vaccinations per day
is now four times what it was in Canada than this time five weeks ago. With Canada having ordered more
vaccine doses per head than any other country in the world, investors are optimistic that the country can build
up herd immunity through vaccinations, and therefore unwind lockdown measures, faster than most of its
There not much macroeconomic news on tap this week, aside from industrial production numbers on Tuesday
and PMI data on Thursday. CAD may, therefore, continue to be driven largely by the country’s vaccine rollout
and the latest movements in oil prices.
The Chinese yuan sold-off rather sharply last week and so far this morning, bucking a recent trend that has
seen the currency largely hold its own and trade within a narrow range against the greenback. Broad strength
in the US dollar is largely to blame for the sell-off. In trade-weighted and nominal effective exchange rate terms
the yuan continues to hold up very well and has been largely flat in the past three weeks or so. During this
time, EM currency indices has suffered broad losses – the JP Morgan EM Currency index, for instance is down
around 4% since mid-February. In our view, this continued outperformance in the yuan versus its peers has to
do with both the outperformance in the Chinese economy and the shift in investor perception of CNY towards
more of a major currency than an emerging market one.
Chinese PMI data out on Wednesday and Thursday this week will likely garner the most attention among
investors this week. Economists are pencilling in an increase in both services and manufacturing activity for