S&P decision not to downgrade Italy's credit rating last Friday, and more positive risk sentiment have pushed Euro pairs higher again after declines in the final days of last week.
Central Banks are playing the waiting game
This risk-positive mood can only be attributed to the numbers of coronavirus infections and deaths, which in both the United States and Europe seem to be on a downward trend as a result of the harsh isolation measures that have been adopted in most countries, and also to the plans of return to normality that the governments begin to prepare.
But there is no certainty as to what these plans will be or how effective they will be for the reestablishment of economic activity, nor what will be the damage caused to the economies.
In this sense, we will have the first GDP data for both the United States and the Eurozone this week, corresponding to the first quarter.
Although these are not descriptive of the impact of the crisis because they correspond in part to months in which neither contagion nor lockdown measures had yet begun, they can give a first insight into the dimension of this crisis, which will undoubtedly be more visible in second-quarter GDP figures.
Presumably, the data from Europe will be worse than that of the United States, if only because the most affected countries, Italy, Spain, and France, began the halt their economy earlier. At the ECB meeting on Thursday, the central bank must show its willingness to do whatever necessary to deal with this disaster situation, including some additional measure that involves increasing the massive injection of liquidity it already provides to the system.
The bank of Japan has already announced that it will remove the limit on bond purchases it makes, and the Fed, which also meets this week, was the first to use much of its ammunition to support the economy.
Any measure taken by the ECB should put pressure on the single currency in addition to that which may arise due to weak growth data.
EUR/JPY has been on a downward trend since the beginning of the year, and after having drilled down the support zone around 116.15, it has been trading at this level again in a pull-back movement. The general sentiment of the market is that with this crisis and if the expected negative consequences for European growth are confirmed, the pair resumes its downward trend with first targets around the 115.00 zone.
The Australian Dollar
A unique case in the currency market during this crisis scenario is that of the Australian Dollar.
As it is a currency tightly linked to the growth and price of commodities as Australia is eminently exporter of these, in other circumstances, it would have been a vulnerable currency and therefore punished by the market. However, in this new scenario, which has never happened before, the Australian Dollar is benefiting from the lower incidence the epidemic is having in its country. Either due to successful measures taken by its government or because its insular character protects it, the fact is that everything indicates that the devastating effects of this virus are not going to be so impressive for the economy of this country. Also, the leading destination of its exports, China, is already in the process of starting up its economy.
For this reason, we have witnessed how AUD/USD has already recovered much of the territory lost since the start of the crisis, has exceeded the resistance level at 0.6440, and is heading towards the 0.6700 zone. The increasingly abundant comments from the market are that this time the Australian Dollar, a currency traditionally vulnerable in economic crises may paradoxically be the winner in this case.