Euro Optimism Wanes Amid Rising Covid-19 Cases
October 19 2020 - 9:57AM
Dow Jones News
By Caitlin Ostroff
Investor confidence that the euro will continue to strengthen
against the dollar is waning as Europe combats rising Covid-19
cases.
Net speculative positions by hedge funds that the euro will rise
against the dollar are at a two-month low, according to data from
the Commodity Futures Trading Commission. In recent weeks, new
Covid-19 cases have climbed in Europe, overtaking the U.S. This has
led governments to implement stricter containment measures that are
likely to weigh on economic activity.
The number of net speculative contracts betting on the euro's
rise against the dollar was about 10,300 as of Oct. 13, according
to data on Friday from the Commodity Futures Trading Commission.
While the consensus is still for the euro to rise, the level of
positioning toward that has fallen from August highs of net 37,000
contracts.
Over the summer, investors began betting the euro would
strengthen against the dollar after the European Union passed a
recovery fund to provide grants and loans to member nations and new
Covid-19 cases fell.
But an uptick in cases and new restrictions could heighten
investor concerns that the EUR750 billion, equivalent to $878.81
billion, recovery fund won't be enough should the rise in cases
curtail the resumption of economic activity. Funds won't be
distributed until next year and could be delayed.
Fresh lockdown measures could also cause eurozone gross domestic
product to slow. Florian Hense, an economist at Berenberg, revised
his fourth-quarter growth forecast to 1% from 2.5% due to the
rising level of Covid-19 cases and restrictions.
The U.K. has introduced a three-tiered system of lockdown
measures for England and moved London to the second-highest alert
tier on Saturday. France has declared a state of emergency and set
a nightly curfew for the Paris region and eight other metropolitan
areas across the country. Last week, the Czech Republic shut
schools, restaurants and bars through early November.
The rise in cases has also weighed on central and eastern
European currencies, with the Hungarian forint falling 2.2% against
the euro last week, its worst week since June. The Polish zloty
declined 1.7% and the Czech koruna fell 0.9%.
"We had this feeling that Europe managed the first coronavirus
wave quite well and that led to a rally. To me now, it does appear
the market is souring on that view," said Jane Foley, head of
foreign-exchange strategy at Rabobank.
As investors have become less assured of the euro's rise, it has
stayed between $1.16 and $1.19 in recent weeks, supported by market
expectations that the U.S. election is less likely to be contested
and will result in a win for Democratic nominee Joe Biden.
Investors expect that larger fiscal stimulus under Mr. Biden, and
more diplomatic policies with other countries, will decrease
uncertainty -- which usually leads to the dollar strengthening --
resulting in a weaker dollar and stronger assets outside the
U.S.
On Monday, the ICE U.S. Dollar Index, which measures the
greenback against a basket of currencies, fell 0.5%. The yield on
10-year Treasury notes ticked up to 0.779%, from 0.743% Friday.
"That's kept a glass-half-full view of risk assets and that's
one of the reasons that eurodollar hasn't fallen more," said Chris
Turner, head of foreign-exchange strategy at ING Bank. "It's
potentially a positive path for the U.S. and the global economy,
and the euro is clinging on to that."
But if rising Covid-19 cases lead to more hospitalizations and
stricter measures, the euro could come under further pressure as
economic forecasts recede.
"There's all of these issues bubbling under the surface and the
euro's beginning to reflect that," Ms. Foley said.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
October 19, 2020 09:42 ET (13:42 GMT)
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