One of the currencies that got stronger during the coronavirus pandemic is the euro. Surprisingly, investors find the common currency as a safe-haven or a shelter during economic recession.
Net long positions hit a fresh all-time high according to the Commitment of Traders report, as many speculators went “all in” on the euro. According to a report by Scotiabank, net euro long positions account for 92% of all the open FX speculative positions.
Euro Higher Despite Negative Interest Rates From the ECB
Last week, the ECB published a report highlighting the positive impact that the negative rates had on the Eurozone economy. That may be true from an economic point of view, but from a monetary stance, the interest rate differential has not favoured the Euro for quite some time now. However, it had a hard time falling below €1.07 and, eventually, reversed sharply.
The moral of this story is that trading currencies is not as straightforward as many would think. If the interest rate is higher on a currency and lower on another, it does not mean that the exchange rate would reflect the differential.
The best example comes from the Swiss National Bank (SNB). Despite holding the interest rate at -0.75% — the lowest in developed countries — it has a hard time controlling the CHF strength. Moreover, it is actively participating in the market, selling CHF, and buying other foreign assets. The SNB balance sheet is up 12.8% YoY due to foreign currency investments. However, at the same time, the CHF is at five-and-a-half years high today. In other words, the market values other elements, so interest rates are not the only thing to consider.
Market positioning for the euro can be hard to measure. As the volume shows, any given FX broker is not accurate because it only shows the trading activity of that broker; so the CFTC report is not entirely accurate. Yes, it gives you an educated guess about where the market tends to focus, but speculators should consider the findings with a grain of salt. If we use measure the euro from the bottom-up by using real-money fund tracking and its relative value, the EUR is instead found to be fragile.
Regardless of the reasons, the euro has had one of its best performances during this crisis.