Date: 05 Sep 2018

To the extent that the currency market, in times of risk aversion, tends to assume investors more broadly will favour either US Treasuries, and will thus need USD, or will opt for traditional ‘safe haven’ currencies like the Japanese yen and the Swiss franc (despite their negative carry cost), then the euro tends to get caught in the middle (EURUSD, EURCHF, EURJPY). That’s even more likely to be the case when, as is currently the case with some degree of market unease about Italy, some part of the market’s aversion to risk is linked directly to a member state of the euro zone. With that in mind, Tuesday’s price action, while characterised by a rising USD generally, led to the currency market running stops below the 1.1569 level cited in yesterday’s post but with EURCHF and EURJPY following in tandem as the pace of USD appreciation versus the euro (EURUSD) outpaced that of its rise versus the Swissy and the yen (USDCHF, USDJPY). The fact that later in the European session, and in Asia on Wednesday, the euro clawed back some of its losses against all three currencies shouldn’t necessarily detract from what happened earlier Tuesday. Euro bulls could argue that Tuesday’s downmove flushed out a lot of remaining long euro positions, and that with market positioning ‘cleaner,’ the euro can/will regain its poise. On the other hand, Dutch bank ING argued yesterday that “It’s difficult to pitch a constructive EUR story when Italy continues to cast a dark cloud over the single currency.” More pointedly, and with particular emphasis on EURCHF, the Dutch firm asserted that the recent move lower in EURCHF “best captures these risks” and while ING sees some risk of the Swiss National Bank (SNB) “intervening down at these levels (below 1.1250), CHF safe-haven demand may also be gaining traction due to a bleak global risk environment” and that the SNB might find it tough to offset such pressure entirely. ING sees “risks of EURCHF at 1.10” this month. Traders will have their own views but, in the current market environment, there’s a strong argument for saying that the euro can’t trade in isolation from wider market themes.

by Neal Kimberley, External Currency Analyst.