"Second Waves" its is the next pricing risk in the COVID-19 era. With nations starting to reopen their respective economies the expectation of increases in COVID-19 cases is growing in the health community and there is justification for this just look at the recent spikes in South Korea, Singapore and Japan.
The risk of a reversion to Stage 3 or 4 lockdown is a huge economy risk and FX will be the first to reflect this risk. The evaluation of this risk from an FX standpoint really comes down to your view on the US’ reopening and speed at which they do so.
Public health experts continue it believe it’s premature and been done without correct regulations. Case in point was US’ head of infectious diseases Dr Anthony Fauci statement at his testimony to a Senate hearing last week:
"trigger an outbreak that you may not be able to control, which in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided but could even set you back on the road to try to get economic recovery."
FX is certainly trying to price this concern in, and pairs are clearly moving to their own set of risks.
Its why I have been concentrating on 4 pairs only over the past month and have tried to ignore crosses because with the pairs I have a constant in the USD.
Therefore let’s evaluate the 4:
- EUR/USD. Since the initial fluctuations in March, the pair has moderated and found a more constant band of $1.07 to $1.10. It had tended to ease to the bottom end of this band throughout April with Europe being the epicentre of the virus and nations shut down their economies future growth questioned. What interesting now is as Europe reopens and growth slowly returns. Europe economically is Asia facing from an export point of view and thus may see demand pick up slightly faster than currently believed. I suspect that come to the end of 2020 the pair is more likely to be at 1.10 or above rather than 1.07 and below. The caveat being a ‘Second Wave’
- GBP/USD is fighting over which country is more effected and from the pair’s viewpoint, it’s the UK. With the UK remaining in a state of lockdown and suffering through COVID-19 more than peers it no wonder Cable is easing. Further to this the Bank of England last week announced its prepared to provide further assistance including negative rates, something the President is hoping the Fed will do. GBP is likely to be near the bottom performer of the G10 over the coming period can see $1.20 as a real possibility in the come months
- USD/JPY has been slowly easing through April and May and although it bounced at the start of last week to ¥107.5 it is looking to easy back to ¥106 as the JPY’s safe-haven characteristics take over. Japanese economy and caseload of COVID-19 is also in a stronger position than its US peer
- AUD/USD got within an inch of it pre-COVID crash of $0.66, however it is struggled to really test this level and with the employment data finally highlighting just how beaten up the economy is, the pair slipped away from this level. Nevertheless, it has not been a catalyst to push it sub $0.64 and with iron ore holding up, and no signs of real meaningful drivers the pair look like drifting inside $0.636 and $0.655.