The trade of the Euro vs Dollar was very promising few weeks back. Then it took the wrong turn. That was based on what the president of the ECB Mario Draghi decided, not raising the interest rates.
From here on here is what is going to impact this trade.
- A recession in the U.S. may cause the Fed to reverse policy or at least to slow the pace of tightening its monetary policy.
Might happen but this is at least 6 months on the horizon, from May 2018.
- Loss of confidence in the dollar and the creditworthiness of the United States.
This is coming as well but we have probable 1-2 years on this issue as well.
- Gradual exit of easy monetary policy abroad and gradual rise of interest rates in part of the rest of the world.
This started to happen in the emerging markets. But the realy move has to be from the ECB to change the EUR/USD ratio. Maybe the EM will cause some sell of in the dollar.
- China announced the creation of an oil futures contract that will be denominated in Yuan and convertible into gold.
This is now happening. This is estimated to cut about 12% of the petro-dollar. So this might help, however the the counter argument to that is that China will be getting the oil from Russia and Iran which might not effect the dollar much.
- The USD tends to perform relatively poorly when the US fiscal situation is weaker, as the current account weakens.
- A ‘Fed inexperience risk premium’ could be discounted in the dollar as a result of a range of newcomers entering the Fed.
This is a non-event. The transition alerady happen. So I do not think mush is going to come out of it.
- There could be risk for a period where the US Dollar correlated with stocks on the way down.
If the market goes down, the dollar will most likely go up due to cash demand.
- Delays in the cuts to corporation tax would hit yields of longer dated Treasuries while shorter dated yields would hold up (flattening of the curve).
- We may not be able to accurately assess trend US inflation dynamics until 1H18.
- Trump is reportedly set to unveil NAFTA proposals that may ‘throw the deal into peril’.
- Rise of money supply and USD liquidity: M1 and M2 continues to climb, mitigating the the increase in interest rates.
- Investors using the USD to hedge their bets on the Fed, just in case they back down from their rate-hiking cycle.
- Protectionism: when introducing barriers to trade, currencies of countries with current account deficits tend to suffer.
However, since the US is a net importer then higher dollar is going to benefit the US.
- Due to regulatory changes in U.S. money market, it may now be no longer advantageous to issue debt in U.S. dollars.
- The Fed shrinking the balance sheet instead of raising the policy rate.
The feds are shirnking the balace sheet but ver slowly.
- China's threat of selling a big chunk of those dollar reserves.
I do not see that happening unless gold rise or something else absorbe the "dump".
- The USD is in a 15 year super cycle decline.
This is a very long term and hardly good for trades.
Refs:
https://www.fxstreet.com/currencies/eurusd
The Feds raised interest rate in June 2018.
China, Russia and Iran are trading oil and other products without the dollar. That is going to be negative for the dollar but it will take a while to get into the system.
But the dollar is hitting new highs, 11 months high to be exact. https://www.marketwatch.com/story/dollar-rallies-to-11-month-high-pound-slumps-ahead-of-boe-call-2018-06-21
The interesting story is the emerging market. All this talk about picking stocks, sectors, country, region became so obviously BS when the rise in the dollar killed all emerging markets. Two thing to remember:
1 – Markets are driven mostly by policy not by "smarts". There is still place to improvise but the vast majority of the gains in the markets from 2009 till today came from cheap money not from smart hedge fund managers knowing what to pick and what not.
2 – In the US the main driver is the feds. Internationally, there are other central banks like ecb, boj, boe. But they are all worried about their recessions. But emerging markets, are also impacted greatly by the price of dollar. But I think this time around and the US politics is going to force everyone to find an alterntive tot he dollar and that is where the dollar is going to cliff.
Currently there is a very strong negative correlation between the dollar and emerging markets. But soon I belive this correlation will be gone and that is the signal to kiss your dollar good bye.
Meanwhile EDZ (opposite of EDC) can be used to offset some of the loss of FXE. As fo now the Euro is at 1.1589. I hope it hangs to 1.15+ level.
Peter Schiff and the rest of the "experts" have been telling people to buy emerging markets though and get out of the dollar. This trade might be good some day but not now. And in my opinion that is the role of the "expert" to tell you when because everything else is determined.
November, 13 th and the dollar index is 97.5. FXE has taken a big hit over the last 6 months. It does not seem that the FEDs are going to lift their foot of the interest rate pedal. They interest rates were increased in September and they are about to do it again in December.
The ratio of dollar/euro goes beyond the tarde itself.
https://www.forbes.com/sites/stevehanke/2018/09/21/to-stabilize-the-world-stabilize-the-usdeuro-exchange-rate/#4356fb3f2303
https://www.cato.org/research/troubled-currencies
The fast rise in dollar impact emerging markets, as I mentioned in previous comments. Also, impacts trades particularly with currency that is not pegged to the dollar.
On September of 2019, by now the FEDs have already cut rates 0.25% and getting ready to cut another 1/4 point in September. The dollar has been rising against the Euro.
Today the ECB decision came out, they are cutting another 0.1%. Now they are at negative 0.5%. Something to note here, is the 20 billion/month buying program and that is “indefinite”.
Here is a reference to the decision.
https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html
The strange thing is that FXE actually went up not down? The only thing I can think of is that this might be a result of the difference. So Draghi cuts 0.1% and Powell is expect to do 0.25% so now the difference is to the Euro advantage. Adopting that logic, one can argue that the Euro has no place to go as far as cuts (the could go more crazy and do more negative but that is going to be another very little moves). So despite the fact that dollar has been wining, perhaps this is the turning point since the Euro has already hit rock bottom.
Over night the Euro was 1.09 against the dollar and now it is 1.11.
The experts of the financial world and the champs of TV were predicting a path to 1.05 and 1.04. The 20 billion a month is about 240 a year. That is no match to 1.4 Trillion in debt we added last year alone in the US. How much debt have the Euro zone added?
According to this article https://www.aa.com.tr/en/economy/eu-governments-debt-reaches-146t-in-2018-/1460584 (and similar other sources) the E28 added about 100 billion of debt in 2018. So with that in mind, the reality is now the pressure should shift to the dollar.
Another factor that might help the Euro, is that fact that the world is trying to be dollar independent. The Euro is a pretty good alternative for now.