Stock indices in the US plummeted. The S&P 500 Index slid more than 3% to the lowest level in two years. As a result, market players started buying treasuries and the 10-year Treasury note yield fell below 1.40% to their lowest levels since 2016 putting pressure on the American currency. Eventually, the EUR/USD currency pair rebounded from its three-year lows. However, the uptrend is expected to be short-term anyway. There are at least three possible reasons for the short-term bullish trend.
1.Monetary policy
After a sharp decline on Monday, US Treasury yields are still higher compared to European peers. Thus, German government bonds yields are in negative territory.
The short-term interest rates also have a positive impact on the dollar. Fed's interest rate is now 1.50% –1.75%, ECB's rate is 0%, and the deposit rate is minus 0.50%.
Even if the US central bank again lowers the rate earlier than expected (according to the derivatives market, there is an 80% probability of the interest rate cut in June), the European regulator is likely to follow the lead. Overall, the fall in Treasury yields is a weak basis for the growth of the EUR/USD pair.
2. Italy is at risk
The US stock market plunged as worries over the spread of the coronavirus in North Italy intensified. Around 50 thousand people are under quarantine in the country.
Italy is the third largest economy in the Eurozone. Currently, there is almost no economic growth in the country. However, the economy edged out of technical recession. Apart from that, the coronavirus has affected Milan, Italy's industrial center.
Thousands of events such as the Carnival of Venice and fashion shows have been canceled.
The longer coronavirus spreads across the country, the higher the recession risks.
3. Problems in Germany
The Federal Ministry of Health in Germany said it was ready to oppose the coronavirus, but the chances of the virus spreading from Italy to Germany are high.
The German economy was stagnating in the fourth quarter, even before the virus outbreak. The economy has recently suffered from the trade conflict between the US and China. Today, Germany is at risk due to the serious situation in Italy and China.
Moreover, Germany plunged into political crisis
The governing party in Germany is expected to focus on choosing a successor of Angela Merkel. However, a certain political vacuum in this matter may affect the national economy. Moreover, Germany demonstrates a negative attitude towards fiscal stimulus, and the absence of a leader at the time of the crisis can further wreck the economy.
The euro continues strengthening against the dollar for the fourth day in a row. On the contrary, open borders in Europe have become a serious problem to curb the spread of coronavirus.The growing number of coronavirus cases in the region can have a negative impact on the economic activity in the Eurozone. As a result, the ECB can become very cautious in making any decision. The EUR/USD pair is expected to reach the 20-day moving average at the level of 1.0917. However, later, there is a possibility of losing profit.
According to Australia and New Zealand Banking Group, the euro is likely to test the lows of 2016 in the coming months.
ANZ economists believe that the EUR/USD pair can once again test the low of 1.04 recorded during the European debt crisis.
Economists fear that German manufacturing industry will probably not recover in the first six months of 2020. Disruptions of manufacturing and tourism in Italy in the coming months is likely to lead the country to a technical recession.
The USD/JPYcurrency pair has been the main victim of risk aversion. The pair is expected to find support near 108. It is a matter of time when the price can break out the level of 110 as the yield of government bonds and stocks in the US is falling.
The main drivers that boosted the price of the USD/JPY pair to the level of ten-month highs are the following: growth divergence in the US and Japan, possible expansion of the monetary stimulus from BoJ due to the high risks of a recession in the country, and capital outflow from Asia to the US based on the impressive S&P 500 index results and high demand for treasuries.
It seems, investors were carried away by the purchase of securities issued in the US. The rise in stock indices amid a slowdown of GDP looked like a "bubble". However, a minor factor such as the spread of coronavirus outside China could blow it off.
The Japanese currency showed the largest three-day growth against its main counterparts since last August as stocks of developed countries fell sharply.
Yen climbed by 0.8% on Monday compared to the middle of last week, when the Japanese currency, traditionally seen as a safe haven asset during times of market turmoil, plummeted amid concerns that Asia's second-largest economy could slide into recession.
The pressure on the USD/JPY pair intensified on Tuesday after the release of weak US consumer confidence data. This report covered the period in which the US stock market updated its record highs. The next report is likely to cause even sharper decline of consumer confidence in the US.
Experts at BNP Paribas Asset Management believe that the yen is second only to the US dollar as a safe haven asset. They expect both currencies to outperform their G10 rivals in the second quarter.
According to experts, the global financial market has finally realized the potential negative impact of the coronavirus.
