Currency Point: COVID Round 3 but bonds still rule

Two factors continue to drive FX – Both have been part of fundamentals over the past 12 months, but one is back for round three the other has been a newer 2021 theme. COVID and Europe and the US and bonds.

For the third time in 12 months Europe facing a ‘third wave’ of lockdowns. Europe’s poor record with containing the virus and now it’s anaemic vaccine roll outs and bureaucracy is impacting its recovery and is finding itself being left behind again.

On the vaccine the EU’s handling of the AstraZeneca vaccine is nothing short of chaotic, blocking shipments but pausing rollout on possible blood clot issues. High levels of vaccine reluctance and a logistical system that is struggling. Further to this, Denmark has prolonged its suspension of the COVID vaccine by three weeks.

What won’t help the European vaccine situation was the public leaking of a US peer review panel discussion around the AstraZeneca vaccine. The leaked document suggests that AstraZeneca used ‘outdated’ data during is phase three clinical trials and that more up to date data was needed. It has since release new data suggesting it has a 73% efficacy rating.

This is will not help European sentiment and could cause another unneeded slowdown in the economic recovery across the world as sceptics point to these issues as reasons not to get vaccinated.

Yet lockdowns are what we are getting with Germany now joining Italy and the like in locking down parts of the country until at least April 18.

All this has smashed the EUR with EUR/USD down as much as 2.1 cents in 5 days. At $1.1770 the momentum has moderated but it’s clear that sentiment is bearish and further signs of increased COVID case like that been seen in central and eastern Europe then $1.15 is very much on the cards.

Looking State side and the US bond trade we have been monitoring remains very much intact. US treasury yields have continued to ease since the ‘FOMC over 10 days ago. In fact, since the meeting US 10-years have moved from 1.75-1.8% to 1.62% with a sharp 7 basis point fall on last Tuesday.

This meant our attention went straight to USD/JPY and as expected the pair has now fallen as far as ¥108.41 which matches the fall in treasury yields – this correlation remains intact and is core to directional trading.