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EUR/USD Spike Is Unsustainable

Hedge Insider profile picture
Hedge Insider


  • EUR/USD has spiked in line with a sharp fall in risk assets, including U.S. equities.
  • It is likely that this move follows an unwinding of speculative trades, and a repatriation of capital following this unwinding.
  • However, this author believes the bond market has got ahead of itself. In the near term, we are likely to see a short-term reversal and consolidation.
  • The equity, bond and currency markets are likely to reverse their reactionary moves in the near term, at least somewhat, ahead of the central bank meetings that are set for mid-March 2020. These meetings present a significant risk of invalidating the reactionary moves.
  • EUR/USD continues to have a negative underlying interest rate differential, which will likely continue to put pressure on the pair in the long term.

The EUR/USD currency pair, which expresses the value of the euro in terms of the U.S. dollar, has rapidly reversed in its trajectory recently. The pair has risen sharply, from prices in the 1.0750 to 1.0800 range (between February 18 and February 21) to over 1.1000 in the trading week which ended February 28. This recent surge, as shown in the daily candlestick chart below, coincided with an extremely sharp fall in global equities.

EUR/USD Daily Candlestick Chart(Chart created by the author using TradingView. The same applies to all subsequent candlestick charts presented hereafter.)

The sharp rise is likely due to an unwinding of speculative positioning. The European Central Bank maintains a deposit facility rate of negative -0.5%, a rate which translates into low euro funding costs via trading intermediaries and currency brokerages. Traders are able to borrow euros cheaply, convert these into U.S. dollars (often on a leveraged basis), enabling them to generate interest income. This continues to place long-term pressure on EUR/USD.

The rise in EUR/USD recently follows a sharp correction in U.S. equities. When risk assets like U.S. equities drop, we can assume that carry trades will unwind (this includes short-EUR/USD positions). This is because when underlying assets drop in value, leveraged carry-trade positions become especially vulnerable to margin calls. Money therefore flows back to where it came from as these positions are unwound.

These sorts of reactionary moves can precipitate when other traders anticipate such moves occurring. In other words, understanding the carry-trade dynamic can strengthen the correlations between risk asset prices and carry trades, as traders attempt to "front-run" the reactionary moves. The correlations are, for example, traditionally positive between U.S. equities and USD/JPY, and negative between U.S. equities and EUR/USD. Whether capital is reactively repatriated or not, we can expect these sorts of relationships to persist to varying degrees.

This article was written by

Hedge Insider profile picture
Providing commentary and analysis, principally focused on global macro, foreign exchange, and equities as an asset class. Primary interests include equity investing from an international perspective, and FX fair values.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

Sperry8 profile picture
Makes a lot of sense. I was wondering why EUR strengthened during crisis. Unwinding (forced or not) of trades makes sense.
Hedge Insider profile picture
Indeed. The recent move persists beyond this article though, it is incredible. "The market is like a large movie theater with a small door."
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