FX Update: EUR surges on signs of budget solidarity

The Euro rose sharply yesterday on an agreement in principle between German Chancellor Merkel and French President Macron on using the EU budget to fund an extraordinary recovery package for the Covid19 crisis. The deal would weight spending to the countries most affected by the crisis – i.e., southern Europe and France and would be funded according to normal “capital key” principles, i.e., Germany representing the largest contributor to the programme, thus a true “mutualization” of this portion of a vastly expanded EU budget, even if it is modest compared to national budgets.

The announcement was justifiably seen as an important step toward more solidarity from the EU, and the market reaction speaks for itself, as the euro rallied sharply against all safe haven currencies, most notably the hold-out EURCHF, which has now lifted over a figure and well away from the 1.0500 area the SNB appeared to be defending. Germany-Italy 10-year yield spreads are some 25 basis points lower today. Skeptics might point to the fact that all 27 EU nations must vote in favour of the deal before it moves forward, and at only a little over 3.6% of EU GDP spread over three years, the size leaves something to be desired. Still, it is likely enough to keep the EU existential wolves at bay for some time, assuming the measures move forward from here – with the next major test perhaps over the June 18-19 EU Council summit.

Risk sentiment saw a fresh strong boost yesterday from early trials of a vaccine from the US biotech company Moderna. We discuss those results and the difficulty of knowing how much hope to invest in the efficacy of this or any other company announcement based on early trials with a very limited number of tests on today’s Saxo Market Call podcast.

Today we will have a look at the political spectacle of US Treasury Secretary Mnuchin and Fed Chair Powell testifying before a US Senate banking committee on the CARES act and some of the difficulties that have arisen in distributing funding to those in need of it and much more. Political posturing ahead of the November 3^rd election will increase as a function of the ebbing of the immediate medical emergency phase of this crisis. The two sides will engage in finger pointing on both the fallout from lockdowns and on the policy response and it won’t be pretty. As the economy continues to suffer, expect agreement on new measures in Congress to become increasingly difficult to come by even as the Fed does everything within its mandate, and arguably beyond its mandate, to provide support.

Chart: EURCHF weekly
The most notable euro pair on the move yesterday relative to recent action was EURCHF, where the market seemed to read yesterday’s agreement between Merkel and Macron as a loud signal in favour of EU solidarity relative to other developments in recent weeks and this helped boost EURCHF more materially away from the 1.0500 that it appeared the SNB has been defending. This package could be enough to boot further EU existential concerns over the horizon for a time if the package is approved and integrated into the EU budget. Not much chart resistance until 1.0800 if the key 1.0625-50 zone gives way here.