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Forecast for euro price for 21 October 2020

2020-10-21

2020-10-21

Euro follows rouble’s example. Forecast for EURUSD for 21.10.2020Dmitri Demidenko

The European Commission’s first issuance of bonds as part of common debt and the capital flow to the European markets support [EURUSD][1] bulls. Let’s discuss that and make a trading plan.

Fundamental forecast for euro for today

Money controls the world. Everything seems to be against the euro: the second wave of COVID-19 in Europe, the [S&P 500][2]’s retracement, the worsening of the eurozone’s economy and the ECB’s hints at monetary policy softening. Nevertheless, the [EURUSD][1] jumps up like a scalded cat. If the reason is the Chinese yuan that has reached its 27-month high against the USD, then why aren’t the Australian and the NZ dollars consolidating? Australia’s and New Zealand’s shares in Chinese exports are higher than the eurozone’s one. As it turns out, it’s carry trade that should be blamed for the euro’s rise.

The story that occurred to the Russian rouble is still fresh in our minds: carry trade made it the best Forex performer in 2019. [USDRUB][3]’s fall looked paradoxical too. The state of the Russian economy left much to be desired, trade wars slowed down the main partners’ GDP and the Bank of Russia dropped the key rate to stimulate inflation. It’s the latter factor that made non-residents buy out governmental bonds in expectation of a rise in price. A similar story appears to be happening in Europe now.

The European Commission made the first issuance of 10-year and 20-year bonds as part of common debt on 20 October. The sale will finance the EU’s coronavirus-relief programs. The issuance volume amounted to €17 billion, and that’s just a beginning. The fund’s total volume is €750 billion. The mass media once presented those bonds as an alternative to treasuries. That was one of the factors in the [EURUSD][1]’s summer rally. I think it’s a mere flow of capital from the USA and developing countries to Europe. Buying EM bonds doesn’t seem to be a good idea amid global GDP’s potential slowdown in Q4. Europe’s periphery is another thing. Greek, Italian and Portuguese bonds look tasty. That lowers their spreads, in comparison with German ones, and points to smaller political risks. Hi, Russia-2019!

Yield spreads in European and German bonds

Source: Wall Street Journal.

The more the ECB speaks about softening monetary policy, the more actively non-residents buy out European bonds, hoping for a price rise in the future. Obviously, German bonds have no room for growth, but the periphery still offers some earning opportunities. By the way, [EURUSD][1]’s 3-month swap spreads became negative in August. That means the Americans can make profit from both a rise in price in EU bonds and hedging.

The risk of a Blue Wave in the USA aggravates the situation. Joe Biden’s victory and the Democrats’ takeover of the Congress will unblock $4-5 trillion in fiscal aid. That will increase the volumes of Treasuries issuance and drop their price. Investors need an alternative urgently, and they find it in Europe.

Trading plan for [EURUSD][1] for today

How long will the euro continue growing, considering the growth isn’t fundamentally backed up? The rouble’s last year example says that everything is possible. The [EURUSD][1]’s quotes can be rising up to the ECB’s meeting on 29 October. Then a sale-out may follow. I recommend staying outside the market for a while.

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Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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