Stronger EU, Stronger Euro

After years of concern and negativity surrounding the Euro currency, we are now witnessing a resurgence against other major currencies across the globe. Part of this performance was definitely due to the recent agreement reached by EU member states on the seven-year budget as well as the COVID-19 recovery plan. The positive currency performance could however hurt Euro zone exports in the longer run, as goods and services provided to non-Euro markets turn more and more expensive.

Following an appreciation witnessed at the beginning of the COVID-19 outbreak, in line with most safe haven assets, the US Dollar has experienced declines for the past few months. This happened as a direct result of the struggle to contain the virus spread, the most recent US-China tensions and a greater worry by investors that the US will lag the global economy, including Europe. Difficulties to control the virus implies that more businesses will be hindered from operating normally for a longer period of time, resulting in more potential failures and a slower economic recovery. Other potential causes of this decline are the ever-increasing deficit, which will result in the issuance of further Treasury debt to finance this, as well as the ultra-low interest rates for the foreseeable future.

Kit Juckes, foreign exchange strategist at Societe Generale, notes that in past days, it is not just the gold that has gone up against the dollar, but almost everything. According to Marc Chandler, chief market strategist at Bannockburn Global Forex, the list of stakeholders who are turning dollar bearish is widening. This list does not only include countries like emerging markets but also hedge funds. This, despite of the fact that the foreign exchange market is still not pricing in the presidential election. He adds that for him, the dollar, gold and stock market are all highly correlated to the decline in US interest rates. The lower interest rate environment is leaving investors with less options to consider for investment. The precious metals asset class and the stock market have capitalised on this as both have ticked higher. The former is a safe haven asset with a perceived higher return potential, while the stock market benefits as dollar exports become more attractive with a cheaper currency. Oil prices also usually benefit from a falling dollar but this has not materialised this time round due to worries brought about by more travel restrictions imposed by countries to control the spread of COVID-19.

During the month of July, and at the time of writing, the US Dollar suffered declines of 4% against the Euro, 3.6% against the Sterling, 2.9% against the Swiss Franc, 3.4% against the Australian Dollar and 3.5% against the Brazilian Real. The dollar index, which is a measure of the currency against a basket of trading peers, reached a two-year low last Monday and a close to a three-year low against the Euro currency. The currency experienced some respite on Tuesday, as an agreement was struck between the democrats and republicans in relation to a stimulus extension package offered by the US government to boost the economy.

Elsewhere, the British pound is also struggling to find some stability according to Bank of America analysts. They observed that this currency is in fact behaving like an emerging markets currency, particularly due to Brexit and liquidity conditions, which could deteriorate further as the end of year looms – when the Brexit transition period is expected to come to an end.

David Bloom, global head of FX research at HSBC agrees with this analysis as he believes that the Sterling has moved into a risk-on currency.

Despite this, movements in Sterling have been more stable than those witnessed in the US dollar, yielding a gain of the Sterling versus the latter. Pressure from the pound was eased further following reports on Tuesday that Michel Barnier, EU’s chief negotiator on Brexit, expressed confidence that a deal between the bloc and the UK is possible. On the other hand, the performance in the month of July of the Sterling against the Euro, up until the time of writing stood at -6.5%, which witnesses the strong performance of the Euro against practically all currencies yet again.

2020 has so far turned out to be the year of uncertainties in which a myriad of short and medium term outcomes on various aspects are still on the cards. At this point, it is still very early to predict the next foreign exchange rate (forex) movements as numerous issues across the globe are unfolding in a very fluid manner. Heightened volatility in forex markets – part due to its nature and part due to the unstable global situation, suggests that diversification within portfolios of underlying currencies and asset classes alike could yet again prove to be the most fruitful medium to long-term strategy. The unexpected is always round the corner and therefore speculation has very limited space when taking investment decisions, particularly in the FX space.

David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]