Analysis | November 19, 2020

Euro & Euro Correlated Currencies & NZD/CAD

Euro & Euro Correlated Currencies & NZD/CAD

“World stocks eased for the third day in a row and oil fell on Thursday tracking overnight weakness in Asia and Wall Street as widening COVID-19 restrictions weighed on market sentiment.” (Reuters)

The SP500 has eased back from the multi-year high made last week and we expect more downside as per previous posts. Strong stock markets have dampened volatility in FX markets and kept the USD weak but downside pressure has eased and speculators are heavily short so we expect a rally.

The euro and correlated currencies are vulnerable in our view. The EU economy is being hit harder by the virus than many other major economies which we looked at in yesterday’s blog, we also have the prospect of more stimulus and a possible rate cut in December which is bearish for the euro. This week we have another problem in the zone…

The EU’s historic coronavirus stimulus is now at risk: Hungary and Poland have been under investigation for potentially disrespecting European values, including by influencing the judiciary and undermining press freedom. (CNBC)

Hungary and Poland vetoed the deal due to the money being subject to the rule of law and there both currently under investigation by the EU.

The stimulus plan is made up of a seven-year budget made of 1.074 trillion euros ($1.28 trillion) and an additional 750 billion buffer (to be raised from public markets). The latter will be divided into 390 billion euros to be distributed in the form of grants, and 360 billion euros in loans.

This veto is threatening to stop the distribution of funds at a time when the region is suffering a huge economic turndown. Analysts at Eurasia Group Noted – it’s a big setback to the EU: “Even in the event of a December deal, there will be a significant delay in when funding reaches vulnerable member states, probably the third quarter of 2021 at the earliest. “The market expects Poland and Hungary to back (but don’t bet on it in our view) the financial support when it comes is too little too late in our view to help the poorer nations of the zone recover.

In our view, the EUR/USD has limited upside, and shortly we will see a sharp move to the downside. The euro correlated currencies should sell-off with the euro and enclosed is our view on USD/SEK and USD/PLN.

The NZD soared higher on all major currencies and an attractive potential risk to reward sell is NZD/CAD. Going forward we view the CAD as the strongest commodity currency and the NZD is now at an overbought extreme and looks a good sell on a break of support for a correction of its overbought condition.

Technical Analysis

NZD/CAD DAILY CHART: The NZD has broken out above the AUG highs – We are overbought technically and both the RSI and stochastic have turned down from overbought extremes – If we break below the 0.900 level we expect a move down to 0.8800 to correct the overbought condition.

EUR/USD DAILY CHART: This pair has traded in a tight channel for several months and we are seeing the rally stall into the top of the range and view the EUR as a sell for a move back to 116.00. On the COT Net Traders Report Speculators hold a 2 year high in terms of long positions while smart money commercials are heavily short which points to a move down to major support at 1.1600.

USD/SEK DAILY CHART: The USD is trading in low volatility above support with tail pokes through the level exhausting – we now expect a breakout to the upside from the channel to follow through on higher volatility to the upside to September highs to correct the USD’s oversold condition.

USD/PLN DAILY CHART: After the recent sharp sell off we have seen the USD trade sideways above support. We think the selling is exhausted and if we can breakout above resistance to the upside we would expect follow through buying on higher volatility to the upside to 4.00 to correct the USD’s oversold condition.


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