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Main » 2020 » March » 19 » Euro act on instincts! Panic in the financial markets leads to the fact that many economic laws do not work
Euro act on instincts! Panic in the financial markets leads to the fact that many economic laws do not work


For the brave. the euro in response to the ECB's decision to expand asset purchases program by € 750 billion, at least until the end of 2020 became a kind of reward for the courageous actions of the central bank. Which in any other circumstances would have drowned the single European currency. No joke, the European regulator will infuse the markets around € 1 trillion of cheap liquidity, more than ever! However, when the USD index from Bloomberg reaches record high in response to a decrease in the Fed's federal funds rate by 100 bp, to be surprised at anything not necessary. 



In the context of seeded coronavirus enormous uncertainty and growing by leaps and bounds volatility, investors rush to buy greenbacks with the speed of an express train. Someone needs cash to avoid margin calls, someone considers the shares cheap and proceeds to the formation of long-term longs, some corny sees no alternatives to the US dollar. According to Goldman Sachs, rallying USD index reflects the unique role of the US currency in the global economy and financial system, rather than the assumption that the United States are more resistant to the effects of the epidemic than everyone else. 


The dynamics of the volatility index VIX and USD


Source: Bloomberg.

European banks with a huge appetite for swallowing the Fed provided by means of currency swaps bait to $ 130 billion, the British bummed at $ 15.5 billion, the Swiss - on $ 2.6 billion in developing countries to receive money directly from the Fed have the possibility, as their currencies continue to fall. abyss. And they are not alone: ​​the unprecedented 2003 collapse in oil prices was the catalyst for the defeat of the Norwegian krone, the rate of which fell to historic lows; and the unwillingness of Boris Johnson to prolong the transitional period due to coronavirus pound weakened to a 35-year bottom. 

From a fundamental perspective, the downward trend on the EUR / USD is due to a more modest loss of the US economy compared with Europe. According to JP Morgan believe that the US GDP in the first quarter to decline by 4% on an annualized basis, in the second - 14%. For the euro area, these numbers look like 15% and 22%. On the other hand, when a real earthquake on the financial markets, the economic laws, and may not work. People paralyzed fear, they act irrationally and instinctively reach for the dollar ...

Market shares is not approved by the Senate President has helped the US plan for a fiscal stimulus of $ 1 trillion, a significant part of which is associated with helicopter money: in fact the Americans will dump dollars from the air, and many of them will receive $ 1,000 in each of the two tranches. However, stock indices continue to dive into the abyss: the Dow Jones erased all gains made since the inauguration of Donald Trump in early 2017. S & P 500 remains only 6% had levels in those times. But at its peak since the presidential election it gained 58%!  

EUR / USD rebound in response to the expansion of the European QE looks no more than a respite for the "bears". They are easily reached the first of the two voiced in the previous article Target to 1,085 and it looks like not going to stop.


Source LiteForex


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