The euro depreciates as coronavirus fears take centre stage (Daily analysis 28.10.2020)

The escalating coronavirus crisis is in the limelight. Sentiment continues to deteriorate over a double-dip recession threat in Europe. Equities extend the sell-off, crude oil benchmarks plunge, and the common currency slips with the EUR/USD pair settling below 1.18.

The French authorities are one step from announcing a one-month lockdown. A recently introduced 9 PM curfew seems to be not enough to stop the rapid spreading of the virus. Similarly, German chancellor Angela Merkel will meet with state representatives to explore potential new coronavirus measures, such as bar and restaurant closures. At the same time, more than twenty US states experience most new cases since the outbreak of the pandemic, but relative dynamics of contaminations seems to be working in favour of the US dollar.

The euro downside limited

Unsurprisingly, the euro slipped on the headlines on France and continues to grind lower in Asia. The EUR/USD exchange rate plunged below 1.18. Given the pandemic situation, the common currency is set to remain on the back foot. Last week’s range 1.17 - 1.19 should prevail, however. The euro downside is limited as market participants expect that a huge fiscal package will follow Joe Biden’s win and trigger a EUR/USD rally, irrespective of an inevitable plunge in economic indicators.

G-10 currencies unfazed

The euro weakness does not spill into broader dollar gains. The majority of G-10 currencies trades flat with the Australian dollar leading the pack with some modest gains. It proves that the market participants feel comfortable in wait-and-see mode, and a strong trigger is needed to see more pronounced swings. European emerging markets currencies continue to trade poorly. They are hurt by the surge in virus cases combined with the risks relating to the economic consequences of both: local and Eurozone’s lockdowns.

Today’s Bank of Canada meeting should not be perceived as a major market mover as well. Although the labour market has already recovered more than ⅔ of the 3 million payrolls lost in March and April, inflationary pressures remain benign. Consequently, the monetary authorities will reiterate there is neither need for additional stimulus, nor room for any expectations of policy tightening. We expect the Canadian dollar to trend lower, mainly due to the oil market weakness.