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What Triggered the V-Shaped Recovery in EURO?

  • Kathy Lien
  • 24 May 2019
Daily FX Market Roundup May 23, 2019
 
For the lack of major US economic reports, it was a very active day in the forex market. The greenback, which traded well against euro, Australian dollar and other currencies prior to the NY open u-turned and ended the day lower against all of the major currencies. USD/JPY was hit the hardest by trade war fears, risk aversion and weaker new home sales. Although stocks initially shrugged off the deterioration in Sino-US relations, investors are finally recognizing the potential impact of a prolonged trade war. With Chinese President Xi warning about a "new long March and "self-reliance," there will be no quick solutions. By evoking a term that relates to Mao Zedong's strategic retreat in 1934, China is saying they will not back down easily and are prepared to make the sacrifices needed to preserve their industries for the years ahead. If China refuses to cooperate, President Trump could push for new tariffs on USD$300B of Chinese goods. The US may not be as intensely affected as other parts of the world, but there's no doubt that US companies and consumers will feel the pain through higher prices and lower demand. Wall Street is finally recognizing the strong possibility of weaker earnings in the second half of the year so USD/JPY, which has broken below 110, could fall below 109.
 
Euro on the other hand ended the day higher after dropping to a fresh monthly low against the US dollar. This is a dramatic recovery fueled by pressure on the US dollar and profit taking right at the April lows. The latest economic reports were weaker than expected with service and manufacturing slowing in Germany and the Eurozone. The German IFO report also declined with the business climate index falling to its lowest level since 2014. The trade war weighed heavily on business sentiment and according to IFO President Fuest, "there is reason to worry, particularly about the manufacturing index." Markit Economics also noted "subdued business growth amid stagnant demand." The euro fell in response but liquidation of US dollars reversed the slide during the NY session. Meanwhile European elections are underway across the region with results expected over the weekend.
 
Sterling also recovered its losses after falling to 1.26. House leader Andrea Leadsom's resignation increases the pressure on Prime Minister May to resign and some expect that it could happen within the week. We think the writing is on the wall and she'll be forced to step down before Parliament accepts the Withdrawal agreement. UK retail sales numbers are scheduled for release tomorrow and given the increase in spending reported by the British Retail Consortium, a good number is possible. If spending rises more than expected, it could trigger an aggressive short squeeze in the deeply oversold currency.
 
The Canadian dollar seems to be completely unfazed by good data. Wholesale sales rose sharply in the month of March, mirroring the rise in retail sales yet instead of resuming its slide USD/CAD extended higher on the back of lower oil prices. The moves in crude have been brutal - it dropped nearly 6% today, which was the worst one day loss in 6 months. Now that prices have fallen below $60 a barrel, we could see further losses if risk aversion and trade war concerns escalate. The Australian and New Zealand dollars on the other hand rebounded. New Zealand trade numbers are due for release this evening. A smaller surplus is expected after last month's strong rise.
 
 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.