FX Update: European FX catching a virus?

FX Trading focus: European FX feeling the pinch from latest Covid wave, perhaps security concerns as well.

Forward concerns on EU growth have been gathering on the natural gas and power crunch that developed into early autumn and is driving an ugly kind of tightening on the economy before the ECB ever gets around to contemplating a rate lift-off. And now we have the latest wave of Covid concerns, especially in Germany where the case count acceleration has been remarkable, as an additional factor that could hold back confidence and activity. This is all adding to the pressure on the euro after strong US inflation numbers and solid jobs and survey numbers in the US have brought Fed expectations to new highs for the cycle – even if the longer end of the US yield curve remains a conundrum in my book. South of 1.1500-25 and the trend is the trend, but the pair is getting very cheap at these levels based on traditional fair value calculations.

With a weaker euro it is no surprise to see even weaker peripheral currencies around the single currency, as EURSEK squeezes back above 10.00 (see more in chart below) and NOK frets the weaker oil price, while the two most tracked CEE currencies, PLN and HUF are poking at cycle lows versus the single currency. Given that the CZK is rock solid with this current backdrop, it shows that the Czech central bank’s more robust signaling on rate hikes and the defense against inflation is paying off. But as well, we have additional idiosyncratic concerns in CEE in the form of an escalating confrontation between Poland and Belarus at the border over the latter importing migrants from the Middle East and then sending trying to send them over the border. Poland has called for an emergency EU summit on the issue as the diplomatic situation looks uncomfortable, to say the very least. This, together with US accusations that the Poland/Belarus border situation has been masterminded by Russia. That together with US officials today warning on Russian forces massed at the Ukrainian border and the weaker oil price also have USDRUB backing up aggressively – watching whether the 72.50-73.00 area holds there.

Chart: EURSEK
The Swedish krona is traditionally one of the most sensitive G10 currencies to risk sentiment. We have hardly suffered much of a setback in risk recently, but the focus on growth concerns in Europe on the natural gas debacle and perhaps now even on Covid, as the SEK in the firing line, given its often that it often is seen as a high-beta proxy to EU economic strength. The squeeze has entered an interesting area – the psychologically important 10.00 area that was the clear support line back in the first couple of months of the year. Watching whether stop may be lined up that can risk squeezing the action higher here short term, but we would likely need a more significant rout in risk sentiment to threaten a structural reversal of the medium term trend, which would need for the action to back up above 10.10-15. I like fading the squeeze into early next week as long as we stay south of that zone, but setting stop levels is difficult here on a Friday and would like to have another look on Monday.