EUR-USD: Caught between two fronts

The Corona crisis has triggered extreme turbulence on the international financial markets. Particularly in March, some dramatic price movements were observed. The "risk-off" sentiment pulled stock markets into sheer bottomless pits, while aggressive spread widening dominated the picture on the credit markets. The situation on the currency markets is somewhat more complex. Here, too, there are, of course, traditional risk-off patterns - these have recently been observed above all among emerging market currencies, which have suffered severe losses. However, currencies are by definition always a relative consideration: it is not enough to say that the corona crisis will result in massive economic losses for all countries. It is the task of a foreign exchange investor to assess which countries are more or less affected than the rest. How difficult the market has found it to weigh up the various economic perspectives and to assess which currencies can be considered safe havens in this environment is clearly evident from the price developments of recent weeks, which have been extremely volatile but above all highly erratic.

The best illustration of this is EUR-USD: the currency pair has seen lows of USD 1.0635 and highs of USD 1.1495 since the beginning of February, and has been spinning in circles several times within this range. While the dollar has been ahead in some phases, the euro has been able to hold its ground again and again. This is mainly due to the fact that there are (still) no clear winners in this crisis. On both sides of the Atlantic, central banks and governments are outdoing each other with expansive monetary and fiscal policy measures. Neither in the US nor in Europe is it really foreseeable at present what effects the crisis (and the steps taken in its wake) will have in the medium and longer term. And neither on one side of the Atlantic nor on the other can we currently rule out a debate on the sustainability of accumulated debt.

From the perspective of an equity investor, "risk off" may be a clear and unambiguous sell signal. A comparison must be made in the currency market. In some cases, such as the structurally weaker EM currencies, this may be relatively easy at present. However, the example of EUR-USD shows that the market is not yet ready to make a final judgment on the relative attractiveness of these two currencies. We do not expect this to change for the time being. We expect the pair to remain in a trading range around $1.10 for the foreseeable future.

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