Why is the EURUSD Up, While Italian Coronavirus Cases Grow Exponationally?

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The Euro has been racing higher this week despite the center of the latest leg of the Coronavirus being Italy. Many find the gain in the Euro being intriguing, and in this short article, we will try to explain why this is the case.

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Sharp Growth Rate of Coronavirus Spread in Italy

On January 25, the number of cases in Italy was about 150, yet 24 hours later, the cases had increased to 322, an increase of more than 100%. In the following days, the growth rate was 47% and 38%. If the growth rate of 38% is extended for seven days, there will be 6243 confirmed virus cases, and add another seven days and 59,504 people will be infected.

In China, the growth rate of coronavirus cases averaged about 35%, and the growth rate slowed after the province of Hubei was quarantined. In Italy, some villages have been isolated, but people have been quick to go back to their everyday lives, so it is too early to know what will happen next, but the growth rate shows that the virus is flourishing.  If the virus spread extends, it is probably that it will reach France and Germany, the two economic giants of the Eurozone.

 

Why is the EURUSD Trading Upwards?

The simplest explanation of why the Euro is gaining is that the Euro is a funding currency, much like the Japanese Yen. The ECB rate is at -0.50%, making it one of the lowest in the world. Investors can, therefore, borrow cheaply in Euros, and then invest the Euros in a country where interest rates are higher, or offer better investment projects. The strategy works well when markets are calm, and people are focusing on growth. However, when there is panic and stock markets decline as they have in the last few days, the Euro borrowers rush to hedge their exposure, and that is probably the most likely reason why the EURUSD is trading upwards.

The same behavior occurred in the Japanese Yen in the last few weeks. On February 19, the USDJPY rallied sharply and reached the 112.26 level. FX traders said that it was because of the potential cancelation of the Japan 2020 Olympics.  While it is rational that the JPY should weaken in times of crisis in Japan, history has shown that when something global, like the Coronavirus spread, occurs, the Japanese Yen tends to strengthen, and today at the time of writing the JPY was trading at 108.65.

 

Written by Alejandro Zambrano, Chief Market Strategist at ATFX UK.

Check out Alejandro’s author profile on InvestingCube for more analysis.

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