Investment sentiment worsens as COVID-19 worries take the central stage and drive risk-off. Despite falling equities and yields, the US dollar trades flat and the EUR/USD pair hovers around 1.18.
On Thursday Chicago issued strict stay-at-home orders and New York limited the opening hours of bars, restaurants and gyms. What is more, the chairs of the European Central Bank, Federal Reserve and Bank of England warned against complacency. They also reminded about challenges for the global economy despite the positive vaccine news.
Safe havens grind lower
In the G-10 space, the EUR/USD exchange rate has settled in the middle of a familiar range. After reaching 1.33, the cable (the GBP/USD) corrects lower as investors await a political breakthrough in the EU-UK talks. This week, safe haven currencies, the yen and the Swiss franc have lost ground. Some corrective strength might be on the table; however, markets are set to remain uncertain. In the case of emerging markets, the Turkish lira continues to stand out and gained over 10% against the US dollar after president Erdogan replaced the central bank governor last weekend. More importantly, he voiced his awareness that stabilizing the lira, which last week traded over 40% lower than at the beginning of 2020, will require raising interest rates significantly. Absent of hikes, the lira would be prone to a renewed selling.
The Scandies look vulnerable
In the last couple of weeks, the Swedish krona has outperformed, and this week the EUR/SEK pair declined to the lowest levels since the end of 2018, and it was traded slightly below 10.20. It means the Swedish currency has already gained 10% against the euro since reaching its bottom in March when it declined to the lowest levels previously seen during the Global Financial Crisis. This stellar performance was driven by market euphoria and corresponded with the krona’s status as one of the most risky G-10 currencies. However, double-dip recession fears and the worsening epidemic situation in Europe pose a threat to the recent SEK rally. Similarly, the Norwegian krone looks vulnerable. Adding to the woes, recent oil prices upsurge looks unsustainable given the weakness of demand and rising production numbers.
Conotoxia research team