Welcome to Coindesk’s weekly macro -pillar, where analyst Omkar Godbole writes about his macro observations and analysis in the wider markets. The views expressed in this column are not investment advice.
A large currency pair that is hardly considered unstable is now competing notorious explosive Bitcoin’s award performance – cannot be met, right?
No longer.
In June, EUR/USD, the most fluid eg -couple in the world, almost 4% to 1,1786, and surpassed Bitcoin’s
2.4% gain. Remarkably, both assets are almost neck and neck this year to date performance, each up to 13%.
Some observers believe that EUR/USD still has room to run higher, a positive sign for EUR-Pegged StableCecoins, which has already benefited from the individual currency’s increase.
“EUR/USD could have the resistance probably in the range of 1,22/1.23,” said Marc Ostwald, chief economist and global strategist at the CEO Investor Services International, explaining that the focus is on Germany that loosens its debt brake, which is seen as “growth positively by most people.”
German exceptionalism and American fiscal policy frighten
The term American exceptionalism – the relative attractiveness of dollar assets, supported by the fiscal expenses of the Biden -era – has historically helped Greenback. However, the story now shows signs of reversing under President Donald Trump’s second period. Concerns about expansion of budget deficits and soaring debt -service costs have given rise to what some now describe as a budding “fiscal policy scare.”
Now, exceptionalism -narrative may switch to Germany.
That’s because Germany early this year announced a landmark tax plan that includes an exemption from defense spending (over 1% of GDP) From the debt brake is a 500 billion euro infrastructure fund to be deployed over 12 years and 100 billion will be immediately directed to the Climate Transition Fund.
The remaining amount is for additional infrastructure investments with EUR 300 billion for the federal government and 100 billion euros for state governments. Finally, the plan will allow state governments to run annual deficits of up to 0.35% of GDP.
The fiscal policy is directly influenced by the German GDP is expected to be felt from next year, and it is expected to be pasted beyond 2027 with positive waste effects for other eurozone nations.
This now changes the conversation to European assets rather than us
“The original condition was a huge overweight in USD and assets, but now it seems that portfolio allocation to European shares, where Germany rose defense and infrastructure expenses,” said Marc Chandler, Chief Market strategist at Bannockburn Capital Markets, in an E email.
Policy uncertainty
Focus on growth potential explains why the US German yield (rate) Differential is like an indicator of exchange rate dropped to the rear burner.
The diagram below shows that the historic positive correlation between EUR/USD and the two-year German-American bond yield-differential has gone down since the end of March.
Furthermore, higher dividends in the United States no longer represent a positive economic view, but is a necessity to finance deficits.
“The dollar may seem to be decoupled from rates, but I think another way of framing it is that the US needs to offer a higher prize to compensate for political uncertainty and the apparent desire for a weaker dollar,” Chandler noted.
Rate Outlook Faves EUR
A potential shift in yields Differentiated tale is to put the euro back in the limelight. Market participants stiffen to return to basic elements – especially the rate of spreads – but the prospects may not be able to bend well for greenback.
“To some extent, the speed -differential prospects of EUR/USD are not favorable for USD if one assumes that ECB is largely finished (maybe one more)While Fed could reduce the rates up to 125 BPS over the next 12-18 months if US growth remains sluggish, “said the CEO’s Ostwald.
The European Central Bank (ECB) Has delivered eight quarter -point cuts in one year, yet the euro is collected against the US dollar. From here, the focus will be on potential cuts in the Federal Reserve. So far, Powell has had rates stable with 4.25% despite President Trump’s repeated calls for ultra-low borrowing costs.
In other words, the interest rate difference is likely to be expanded in favor of EUR.
Need for higher eg hedge conditions
Historically, USD has offered a natural coverage to foreign investors in US equities.
So, of course, as the positive correlation between US equities and the dollar is broken, European pension funds – which accounts for almost half of foreign possessions in US equities – and other investors are forced to increase their eg cover to protect the portfolio’s return against dollar weakness. According to market observers, this, for example, could -cover strategy could continue to operate the euro higher in the short term.
Let’s put the cover strategy into context. Imagine a European fund with $ 10,000 investment in the US if the US dollar (USD) becomes weaker compared to the euro (EUR)The fund’s investment loses value when converted back to euro.
To uncover against this currency risk, the fund may consider uncovering part of this investment by taking short bets on the dollar via forward, futures or options, adding the dollar bearish momentum.
“Using the monthly Danish pension flow data such as European proxy, April then an increase higher in eg -covering ratio from 61% in January to 74% in April. We have seen 80% levels before, so there is room for higher and also More consistent For example, for all European investors, who will of course see EUR sales on Newsflow faded daily until that flow toppes. We are not there yet, but we are much closer, “Jordan Rochester, head of the FICC strategy at Mizhou, recently explained in a LinkedIn post.
According to Financial Analyst Enric A., fewer than 20% of European institutions are currently uncovering their USD exposure, and they need to do more to stabilize portfolios, which could lead to further USD Bearish Momentum.
“Higher hedge conditions = more EUR purchases, more USD sales,” Enric said on LinkedIn.
And to end it, covering the funds of other regions may have had the same effect. Chandler quoted BIS data while highlighting the uncovering of Asian funds.
Bottom line: When macro stories change against potential American fed easing and cover dynamics exert pressure on greenback, EUR/USD can remain fluid despite the fact that eurozone growth winds.
Read more: Is it time to reduce, uncover and diversify USD exposure?
