The euro-dollar towards 1,30
From a technical point of view, the exchange rate is close to a very important resistant threshold at 1.20, which once exceeded would further weaken the greenback
The eyes of managers, analysts and investors are all pointed to the euro-dollar which, after the surge in recent weeks, first exceeded the highs of last September 3rd (at 1.15) and then went close to January 2017 records at 1.209.
This movement is not unexpected, especially if considered from the dollar perspective.
Over the past 20 years, the greenback has always worked as hedging during the collapse of the S&P500.
On the contrary, when the stock market was heading towards recovery, the dollar always devalued. It happened in 2001, when the US currency lost about 50% on the S&P500's rebound, also in 2008 when against a 55% recovery in the US index, the greenback depreciated by approximately 30%. And 2020 has not been different, with the dollar falling by 12% on the S&P 500’s rebound.
The technical point of view
From a technical point of view, the euro-dollar exchange rate is now at a crossroads, with the 1.20 threshold (average exchange rate since 1975) which is fundamental for the future of the greenback. In fact, close to this level we can find the mobile resistance, which combines the decreasing peaks from the records reached in July 2008 at 1.60. Since then a downward trend has started, characterized by downward waves of 20% followed by upward spikes of 20%. If we were now in an upward spike, therefore, it would be reasonable to expect a further surge in the euro-dollar towards 1.30, with an upside, compared to the current levels of around 8%. If the resistance at 1.20 were confirmed as such, however, the dollar could also resume the downward movement in progress since 2008, with a first target at 1.15 and a subsequent one at 1.10.
Hedging at low cost
It’s not easy to predict the euro-dollar future now. But if we go beyond the mere technical aspect, it seems to gather all the conditions for a depreciation of thedollar. Starting with the yield on the US Treasury, with the 10-year falling to 0.53%. Then, in regards to the health crisis, America is far behind Europe. Furthermore, looking at the valuations of assets, the Old Continent today is much cheaper than the United States and this could lead many investors to choose European instruments than American ones.
In this scenario, it is possible to have a protection against a further depreciation of the dollar by hedging against the exchange rate risk. Currently, Hedging costs (measured by the differential between the 10-year Treasury and the Bund) are not excessive. Indeed, they have been at their lowest levels since 2013, in the amount of 1% (six months ago they were 3%). For this reason, at Pharus, we have decided to continue with our hedging strategy.
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