EURUSD Weekly Commentary

The political unrest in Egypt has got much of the world’s attention, albeit in our opinion it is unlikely to escalate. On Friday US equities experienced the largest decline in the last 2 months whereas EURUSD fell from 1.3693 the day earlier to 1.3607. However, there hasn’t been much movement on a weekly basis as the cross started the week at 1.3604.

The strength of the Yen and the Swiss Franc confirmed that the investor community is nervous about the situation in Egypt. This was mainly due to the fact that closure of the Suez canal would increase the amount of time it takes for oil to be shipped from the Middle East (where about two thirds of the OPEC global production capacity are based) to Europe, and hence cause a spike in oil prices. All in all, Egypt isn’t one of the biggest oil producers - but this logistical issue could easily cause oil prices to spike above $100/bbl. And the last thing the world needs now is higher energy prices as this would force central banks to tighten monetary policy at a time where world recovery is still far from certain.
Unless the situation in Egypt settles down over the weekend (unlikely), we expect another wave of selling as investors remain nervous about the situation in the country.

After a period of continued strength, we finally saw a decent correction in EURUSD. However, contrary to the many previous occasions this was not due to concerns around the European sovereign debt situation. It was rather the Egyptian situation who took it down as it would require the ECB to raise rates to fight the inflation caused by higher oil prices. This would hurt the common currency as most of the EU countries (with the exception of Germany and France perhaps) would see their growth significantly hampered by higher rates.

We expect the turmoil in Egypt to persist at least over the next few days and given the general nervousness of the investor community, we expect another wave of EURUSD weakness the week ahead.