Stock markets made a remarkable recovery on Friday although for most of the session they behaved erratically without showing clear direction.
In Europe, ECB Visco's statements, which amended Lagarde in that the ECB had no responsibility for credit spreads, were a cause of relief. But the situation is still far from being considered out of the woods.
The concern about the spread of the virus is evident and the countries take extreme measures. In Spain and the United States, a state of emergency has been declared, which will mean the prohibition of mobility between states and regions, business closings, and a request to the population to restrict their movements.
The longer these measures, already in force in Italy, are maintained, the greater the damage to the economy. The European Commission already assumes that the economic recession will hit Europe in the coming quarters.
The consequences are going to be of great magnitude and although the stock markets have been momentarily contained, a recovery cannot be expected.
We said yesterday that the US dollar was returning to its safe haven currency status and to a certain extent it has been so, EUR/USD lost ground to support 1.1050-60 and remained slightly above these levels with a downward bias.
But the Dollar also strengthened abruptly against the JPY, rising more than three figures in a single day.
In the current context of risk aversion, although this sentiment paused on Friday, this behavior of USD/JPY is counterintuitive. Normally this pair would also have suffered sales pressures from JPY buying flows.
One reason, if not the main reason, is a short-squeeze of liquidity in the Dollar money market. For this reason, the Fed is increasing repo amounts to the market at historically high levels. But the difficulty of financing in Dollars in the money market causes the closing of short positions in USD/JPY, which for fundamental reasons are very high.
Will this situation last long? If the volatility in the stock markets decreases and the liquidity provided by the Fed takes effect, it should return to normal.
This phenomenal rise in USD/JPY has dragged EUR/JPY - the correlation of both pairs in the short term is almost 80% - making it also rise almost 300 pips in one day.
An example of the unusualness of this movement is the loss at that time of the correlation of EUR/JPY with Copper as we can see in the 5-min chart. Decoupling started around 5:00 p.m. CET.
It is reasonable to expect that all these counterintuitive movements, far from fundamental, will be corrected in the next few days and that the Euro continues to suffer sales pressures against both the Dollar and the Yen.
Europe is now the area hardest hit by the epidemic and the consequences on its GDP, as recognized by the European Commission, will be very serious.
Sources: tradingview.com; capex.com
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