Euro heading for the heavens as US$ enters purgatory


The Euro is up 1.5% for the week so far and last sat comfortably at $1.2140. Having finally breached US$1.2000 after multiple attempts, momentum funds have surged in to long positions. The next serious chart resistance level is not until $1.2555.

SYDNEY: The euro was headed for its best week in a month on Friday and has blown past major resistance levels as investors piled into bets the U.S. dollar has further to fall as the world begins to emerge from the COVID-19 pandemic.

The common currency is up 1.5% for the week so far and last sat comfortably at $1.2140. Having finally breached US$1.2000 after multiple attempts, momentum funds have surged in to long positions. The next serious chart resistance level is not until $1.2555.

The euro is also set for its best week against the Japanese yen in six months, even though the yen rose a little against a broadly weaker dollar overnight. Sterling touched a one-year high and the yen hit a two-week top.

"The euro is holding above the $1.21 level for the first time since spring 2018, despite the fact that there is only a week to go before the European Central Bank is expected to add more policy stimulus," said Rabobank strategist Jane Foley.

"There is no doubt that the actions of the Federal Reserve have been hugely successful at weakening the value of the dollar since the spring this year."

Investors have turned heavily short dollars in recent months, figuring rates will stay low for a long time in the United States forcing yield-seekers to head elsewhere for better returns.

Against a basket of currencies the dollar has shed about 12% from a three-year high of 102.990 in March, to hit a two-and-a-half year low of 90.504 on Thursday.

The Australian dollar struck a 28-month high of $0.7449 overnight and is up nearly 0.8% for the week so far.

The New Zealand dollar made a fresh 31-month high overnight and is set for its fifth consecutive weekly gain, a streak which has put it 8.6% above late-September lows.

"Call it December seasonality come early, call it what you will, but the market's appetite for the kiwi is insatiable at the moment," ANZ Bank's chief economist Sharon Zollner and strategist David Croy said in a note on Friday.

"And while the rubber bands of momentum and valuation are starting to get stretched, technically it looks very solid; commodity prices are rising; and nobody wants to own dollars... a break of 0.7160 would be extremely bullish."

Even worries about painful winter of deaths and lockdowns in the United States has failed to drive too much safe-haven demand for dollars, as investors reckon on more government support - either in the form monetary easing or fiscal spending.

A $908 billion aid plan gained momentum in Congress on Thursday as conservative lawmakers expressed their support and the Federal Reserve meets later in the month amid speculation it could expand its bond-buying programme.

Both are viewed as negatives for the dollar since bond buying would keep yields anchored, and spending could support a bullish mood and the buying of riskier currencies.

Investors are looking to U.S. jobs figures due later on Friday for the latest signs of the recovery losing momentum, while the fate of the pound is largely in the lap of Brexit trade deal negotiators who remain locked in talks.

"Traders need to assess their sterling exposures into the weekend," said Chris Weston, head of research at Melbourne brokerage Pepperstone.

"If I were running long exposures, I wouldn't be adding... but questioning, if we see a deal, how punchy the gapping risk will be," he said. "If we don't get a deal and the rhetoric from (EU negotiator Michel) Barnier or the British camp shows limited progress then we could see GBPUSD gap lower on Monday."

Sterling could be in for a bumpy December as Britain's informal membership of the European Union expires at the end of the year and the two sides have yet to agree on their future trading relationship, a Reuters poll found.

The pound has travelled a rocky road since Britons voted to leave the EU in June 2016, with the currency fluctuating on any Brexit news, but diplomats said on Thursday they hoped a trade deal with Britain could be agreed by Friday or at the weekend.

Currently hovering just over $1.34. medians in the Nov. 30-Dec. 3 poll suggested it would trade between $1.31 and $1.36 this month. Against the euro it will trade between 88 to 91 pence, close to Tuesday's 90.2p.

"The market seems 75-80% priced for a deal and thus in the event of no deal the downside is much greater than the upside if there is a deal," said Colin Asher at Mizuho Bank.

Suggestions by several officials in the EU that negotiators will soon review overall progress is widely seen as a positive sign after weeks of impasse over three main issues - fisheries, economic fair play and settling disputes.

A British minister said he believed "good progress" was being made at talks but cautioned London would not sign up to a deal not in its interest.

However, derivative markets were flashing red on Thursday amid doubts Britain and the EU can strike a deal before the transition period ends, offsetting any optimism from Britain becoming the world's first country to approve the Pfizer-BioNTech COVID-19 vaccine.

But successive Reuters polls of economists since the referendum have said the two side would reach agreement and the wider poll of 50 foreign exchange strategists said the pound would climb to $1.39 in a year's time, stronger than the $1.35 forecast given last month.

Against the common currency the pound will be at 89p in a year.

"The margin for sterling to appreciate against the greenback is significantly higher as the euro would also benefit from a deal. Sterling is significantly undervalued against the dollar and a Brexit deal would favour sterling outperformance," said Roberto Cobo Garcia at BBVA.

A confidence boost from a successful closure to the Brexit drama would offer extra support for the pound as the U.S. currency is under growing downward pressure from the prospect of a new round of massive stimulus from the new Democrat administration.

Alongside that, investors continue to ditch the dollar in favour of risky assets and higher returns so the greenback's weakening trend will last at least another six months, the poll found.

- Reuters
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