how to take advantage of the devaluation of the greenback


The intraday and real-time data of the EUR / USD chart are taken from the quotes of OTC products.

In recent months the trend of American dollar it has undergone numerous fluctuations due to both geopolitical events that have opposed China and the United States and to the economic effects caused by the COVID-19 pandemic.

What can we expect from exchange euro Dollar? The green ticket can the global reserve currency still be defined? Which operational ideas can they be drawn from its eventual devaluation?

The euro-dollar exchange rate and the impact of the COVID-19 crisis

After a strengthening in the first part of 2020, from late April onwards the dollar started losing ground against the euro.

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Euro dollar exchange rate, historical period: September 2017 – June 2020

The main causes are mainly:

  • the tightening of tensions between China is United States;
  • the strong wave of COVID-19 infections on US territory and the substantial drop in the price of Petroleum on futures markets;
  • the increase inuncertainties about the future of the economy global and the raising of fear in financial markets by market operators (as shown by the values ​​achieved byVIX index in the United States and the index VSTOXX in Europe).

The intensification of tensions between China and the United States for commercial reasons concerning the duties first and for COVID-19 then contributed significantly to a strong fluctuation in the euro-dollar exchange rate in the market forex, determining:

  • a devaluation the green ticket in the last part of 2019, when the trade conflict between China and the United States was more intense;
  • a recovery of the dollar over the euro in the phase pre-COVID-19, when the trade conflict between China and the United States seemed to diminish in intensity;
  • one shift of investors on dollar-denominated assets during the month of March 2020, due to fears about the stability of the EU zone after statements by Christine Lagarde on measures to be taken to mitigate the economic effects of COVID-19 in Europe.

The high volatility in financial markets caused by economic uncertainty from COVID-19 and geopolitical tensions has created difficulties in making future forecasts regarding the trend of the euro-dollar exchange rate.

The EUR / USD exchange rate, absorbing i new risk factors with regard to both global geopolitical tensions and the new health situation, it suffered a strong increase in volatility compared to last year.

Distribution of the daily change in the historical euro-dollar exchange rate

This scenario has prompted investors to move more towards safe haven currencies like it yen or commodities like thegold.

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</div><h3 class="spip">The impact of the rate differential on EUR / USD</h3>

Then there is the interest rate differential between European and US bonds.

With a very wide interest rate differential between the US and Europe, the demand for dollars from investors increases, attracted by the higher nominal yields that US bonds provide to those issued by the countries of the old continent.

In the last period, due to the monetary policies of both the FED and the ECB dedicated to providing substantial support to the American and European economy, respectively, the yield differential between US and European bonds it has been reduced.

Yield spread on 10-year US bonds and 10-year German bonds. Period: September 2017 – June 2020

As consequences it turns out to be cheaper to buy dollars to invest in US bonds.

Opportunities and operational ideas on the euro-dollar exchange rate

Despite the reduction in the yield spread of bonds, profit opportunities are still open when trading on the euro-dollar.

The recent increase in the cost of financing in dollars as a consequence of devaluation the greenback vis-à-vis the euro opens the possibility of gains on the forex market by using derivative instruments with the forward he swaps.

Currently the parity hedged on interest rates or covered interest parity (CIP) no longer works, therefore it is possible to take spot positions on the forex market and earn on the future trend of the dollar through derivatives.

This strategy may also return profits in the future in view of further devaluations of the greenback on the euro associated with an increase in volatility.

Euro-dollar exchange rate forecast. Period: 19/06/2020 -31/12/2020

Distribution of the daily change in the future euro-dollar exchange rate

Despite the strong present and future volatility and the high economic uncertainties that do not allow investments to be made with excessive financial leverage, the use of derivatives such as currency swaps, forwards and options on the euro-dollar rate could be an option to obtain profits on the forex market by taking advantage of both futures devaluations of the dollar that new spikes in volatility.

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</div><h3 class="spip">What are the future expectations?</h3>

The global economic situation and geopolitical tensions continue to persist and influence financial markets around the world.

Despite the climate of uncertainty, the enlargement of the plan Peep by the ECB and the purchase of corporate bonds by the FED they are supporting markets that continue to perceive the dollar as a global reserve currency.

In this scenario, a further devaluation of the dollar, in addition to providing profit opportunities in the forex market, can be a wake-up call regarding timing of the economic recovery global.

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