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Main » 2020 » February » 27 » The euro and the effect of the bat! The sufferings of Germany and the euro zone because of the coronavirus is not over yet
The euro and the effect of the bat! The sufferings of Germany and the euro zone because of the coronavirus is not over yet


Investors used to the cliché that the wave of a butterfly's wings in Brazil can cause a tornado in Texas. At this time we are talking about the bat, spread its wings in China. Until then, some stocks ignored the coronavirus, did not consider it-lasting factor, but the spread of the epidemic around the world has led to subsidence of the red zone. More than half of the 100 experts estimate Reuters global stock market correction risks by 10% or more as high. 



For pandemics are important not only scale, but also time. According to a Bloomberg analysis, China's economy faced a fall of five of the eight key performance indicators and two indicators of business confidence fell to the lowest level in history. The question is how quickly Beijing will be able to cope with the coronavirus? Local officials face a difficult choice: Xi Jinping requires them to maintain high GDP growth rates, which, without removal of the quarantine and the return of people to work will not reach. On the other hand, in this situation the country is threatened by a new outbreak of the epidemic. 


The state of China's economy


Source: Bloomberg.


suspension of production in China violates the supply chain and a serious blow to international trade and global GDP. Given the high share of exports and imports in gross domestic product, the main victims are likely to become Germany, allowing ANZ to paint a bleak picture for the "bulls" on EUR / USD. Banking Group believes that against a background of slowing euro zone economy will fall into a couple of 1.04. 


Dynamics of the share of trade in GDP


Source: Wall Street Journal.


Meanwhile, the euro, on the contrary, continues to correction against the greenback and managed to rise above the bottom of the 9th figure because of the rumors about the German Finance Minister Olaf Scholz readiness to remove the constitutional rule that limits the ability of local authorities to build up debts. This will allow them to increase their investment, and the total amount associated with this measure of fiscal stimulus Bloomberg estimated at € 20 billion. In contrast to the European, the German budget is regularly closed with a surplus, and Berlin can afford to untie the purse. 


The dynamics of the budget balance to GDP ratio


Source: Bloomberg.

Fiscal stimulus is able to prove that monetary expansion is not the only game in town. Until recently, investors believed that only central banks are able to cope with the impending global economic disaster. In this case, the depth of loosening monetary policy supports the "bulls" on EUR / USD. Since derivatives CME believe the Fed in 2020 will reduce the federal funds rate by 50 bp, while the money market indicates a fall of interest rates on deposits only the ECB by 10 bps 

In my opinion, the current correction of the main currency pairs is related to the closure of long positions in US stocks, however, the force of impact on the German economy coronavirus is much more important than the US GDP. If in the next 3-4 weeks China will not be able to cope with it, EUR / USD risks to renew the southern campaign. In this regard, actual shorts are in rebound from resistances to 1,095 and 1,1.


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