Market Analysis

Does Event Risk Justify Current Euro Levels?

In his post-G7 tweets, US President Donald Trump spoke of possible tariff on automobile imports into the United States. While that will have caused unease in Germany, it’s arguably Canada, Japan and Mexico that would be hardest hit initially. That might explain why USDCAD, USDJPY and USDMXN all reacted, at least initially, as they did yesterday. What’s perhaps more interesting as Tuesday begins in Europe is that the CAD and the JPY have remained largely on the backfoot versus the USD even as the euro (EURUSD) has held up, as a glance at the EURCAD and EURJPY charts will confirm.

That might suggest the market is choosing to run long of euros into Tuesday’s US CPI data, Wednesday’s Federal Reserve decision (presumably on the assumption a Fed hike is already priced into the market) and on the assumption that Thursday’s ECB meeting will indeed indicate that a debate on fixing an end date for ECB asset purchases has begun. The risk is arguably that the market is underestimating the possibility of a hawkish surprise from the Fed and overstating the likelihood of a more hawkish ECB outcome. Traders might wish to ponder whether the relative levels of USDCAD and USDJPY reflect more CAD and JPY weakness or whether the driver is USD strength. Those who feel the former is the case might well be comfortable with a long euro exposure. Those who, on balance, feel the latter is the case might wish to re-think the logic of a long euro exposure.

Written by Neal Kimberley, External Currency Analyst.