Euro halts 6 day run, crushing pressure on CAD

Euro snapped a 6 day rally to start the week lower against the US dollar. Over the past month, the moves in EUR/USD have not been for the faint of heart. The single currency surged from a low of 1.0784 to a high just under 1.15 in less than 2 weeks as stocks plunged lower. The first wave of strength was driven by euro funded carry trade unwind. Then the pair peaked, falling just as quickly and more sharply in the days to follow. In less than 2 weeks, the pair gave up all of its prior gains to hit a 2 year low under 1.07 on the back of rapidly growing case numbers in Europe.  However exactly a week ago, EUR/USD bottomed and marched back to 1.11 as the virus spread across America. How EUR/USD trades in the days ahead will depend on where the virus peaks first and then the extent of economic damage. We can’t predict the tenacity of the virus but the Eurozone economy won’t be able to recover without US turning the corner first. We continue to look for EUR/USD to trade back to its lows and on a technical basis, the move may have begun.

Meanwhile this is an important week for the US dollar which moved higher against all of the major currencies on Monday. With the $2 trillion stimulus package done, the talk has turned to a Phase 4 fiscal relief. By now, we all know that fiscal stimulus can’t contain the virus. Faster testing, peaks in the curve and a vaccine is needed for a durable recovery. We are getting close to the first with the FDA authorizing 5 and 15-minute tests by various labs. However in the near term, faster and more broadly available testing means a greater number of positive cases - but that needs to happen before the curve can peak. 

The reason why this is an important week for the US dollar is because non-farm payrolls and the ISMs are scheduled for release. Last week’s jobless claims gave us a taste of the damage COVID-19 is doing to the economy. While the March NFP report may not show the true extent of the damage (economists are only looking for NFPs to fall by -100K), job losses are expected for the first time since 2010 and it may not take much of a downside surprise to trigger a big sell-off in the dollar. NFPs are due on Friday but ADP on Wednesday could kick off the decline if private payrolls fall sharply. We are also looking for a big decline in the ISM manufacturing index given disappointing Empire State and Philadelphia Fed surveys. With that said, the rally in stocks on Monday helped USD/JPY avoid another day of steep declines. 

The worst performing currency today was the Canadian dollar which fell more than 1% against the greenback. The currency is still feeling the residual effects of the Bank of Canada’s surprise rate cut on Friday. The central bank lowered interest rates on 3 separate occasions this month by a total of 150bp. There’s very little room for further movement but their dovish outlook remains intact. Today’s decline in the loonie was driven by oil which dropped briefly below $20 barrel intraday to an 18 year low. In the past 5 weeks, the price of oil dropped 60%. We should be nearing a bottom in crude but for the time being, the cessation of activity across the globe means less demand for oil and for the Canadian dollar between rate cuts, coronavirus and oil a move back up to 1.44 seems likely. Canadian GDP numbers are scheduled for release on Tuesday but these are January numbers, which means there will be little COVID-19 impact. 

Chinese PMIs are also due for release tonight – economists are looking for an improvement but if the data shows ongoing weakness, the Australian and New Zealand dollars should resume their slide.