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Why Did Euro Escape Losses As Stocks Tumbled? | Investing.com

The sharp sell-off in U.S. stocks on Monday drove currencies sharply lower. While monetary policy is an important long-term driver of currency flows, risk appetite has the most significant short-term influence on currency movements. Sentiment is king because when investors are nervous, nothing else matters. We saw that today, with the Yen and Swiss crosses tumbling on the back of the steepest decline in stocks since October. 

 

Investors are nervous about the Delta coronavirus variant, rising prices and how taper actions of some central banks could impact the markets. Over the weekend, new restrictions were imposed across Asia as Indonesia overtakes India and Brazil in new infections. Cases in Singapore rose to their highest levels in nearly a year, forcing the government to restore restrictions that have been recently eased. Cases are rising in Israel as well, with the country reporting a drop in Pfizer (NYSE:) vaccine protection against the new variant. In the U.S., Los Angeles revived its indoor mask mandate for all people regardless of vaccination status. Investors are rightfully concerned about the negative implications for growth, but the real worry is how many more countries will reintroduce restrictions and what the fall could look like. Travel bans could return along with social distancing measures. 

 

While it may be a few weeks or even a few months before we get a sense of how badly the hospitalization rates rise in countries with high vaccination rates, risk aversion could wreck havoc on the financial markets. I always like to say that when the market crashes, it often goes further and for longer than most would anticipate. This is especially true for currencies. Aside from the sell-off in stocks, Treasury yields also plummeted, with the dropping 11bp below 1.19% before settling just under 1.2%. 

 

Ironically, the currencies of the two countries that reduced stimulus last week were hit the hardest. was the day’s worst performer, losing more than 1.5%, followed by , which dropped over 1.3%. However, this underperformance is not a complete surprise because NZD and CAD are high-beta currencies, which means they are exceptionally sensitive to risk appetite. For CAD, the more than 7% drop in added pressure on the currency. was the steadiest major currency, which is not a surprise as the Yen and Swiss Franc are both safe havens. closed below 110 for the first time in more than a month. If stocks continue to crash lower and Treasury yields fall in lockstep, we would not be surprised to see USD/JPY below 109.

 

To some, the resilience of the euro is surprising. Unlike , which dropped 0.65% and the commodity currencies, which lost more than a 1% of their value against the greenback, was virtually unchanged. Considering that the European Central Bank meets this week and it could avoid taper talk because of the Delta variant, the euro should be trading lower. The ECB also set a new inflation target last week that it will need to explain. This adjustment allowed for inflation to overshoot and a slower policy response. With that in mind, the primary reason why EUR/USD escaped losses as stocks tumbled is because low rates combined with a dovish central bank made the euro a favored funding currency. The ECB doesn’t meet until Thursday, so the outperformance of euro could continue if the sell-off in stocks deepen. 


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