During periods of recession, the rules of the game on Forex are greatly simplified. Investors are looking at one single currency - the US dollar, which serves as the main asset-refuge and is sensitive to changes in the global risk appetite. The benchmark for the latter is traditionally the S&P 500, whose rapid growth is not always logical. Even with a record number of deaths in the United States and horrific macro statistics, investors are grabbing stocks like hotcakes, seriously hoping that a recovery in stock indices will precede a recovery in the economy.
The market is not afraid of either the 6.8% subsidence of China's GDP in the first quarter, the increase in the number of unemployment claims in the US by 22 million in 4 weeks, or the sharp jump in mortality in the States. Investors are looking for good news, grabbing at them and starting to pray. The 3% S&P 500 rally at the auction on April 16 was due to the “Re-discover America” plan announced by Donald Trump and the announcement of the impressive results of the drug Remesivir in the treatment of coronavirus. The stock index could not fall - the American dollar could not grow.
Source: Wall Street Journal.
The global downturn has made investors forget about the divergence in economic growth and monetary policy that have driven the Forex market in previous years. They do not care at all that the recession in the eurozone, according to IMF forecasts, will be deeper than in the States, and the growth of Italian bond yields strengthens the risks of an expansion of European QE. According to Nomura estimates, the ECB has bought up bonds of € 85 billion over the past 9 days, and it will have to double its current scale of the quantitative easing program (about € 130 billion per month) to counter the further slowdown in GDP and inflation in the eurozone. According to Christine Lagarde, the central bank is ready to increase the purchase of assets as much as necessary. Isabel Schnabel, a member of the Governing Council, argues that the ECB intends to adjust monetary policy instruments,
Yes, the Fed is buying a lot more bonds, it has thrown out $ 1.6 trillion for these purposes in the past four weeks, but expectations of death are worse than death itself. Expectations of weakening monetary policy are a much more significant driver of exchange rate formation on Forex than monetary expansion itself. In normal conditions. The recession does not allow us to call the current conditions normal.
The fact that China's GDP dipped 6.8% in the first quarter is negative for the euro. The export-oriented economy of the eurozone is facing a significant reduction in external demand. We saw the same thing, albeit on a smaller scale, during the time of the trade wars, when the euro fell against the US dollar amid divergence in economic growth.
Today, the rules of the game have changed. Investors grab onto the good news and discard the bad news, which pushes the S&P 500 up and shuts off the oxygen to the “bears” in EUR / USD. In my opinion, this cannot go on forever. The stock index will soon enter into a state of consolidation, which will force the main currency pair to choose the trading range of 1,065-1,115.
LiteForex Analyst Source