EURUSD Hits Fresh Multi-Year Low, How Distracted Is President Trump?
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Dollar Talking Points:
- EURUSD continued its slide through Thursday to secure both a fresh two-and-a-half year low on both a close and intraday basis
- Beware Quarter-End Liquidity Conditions Converging with Recent Overnight Funding Pressures
- Political headlines are distracting, but will it keep markets and officials away from recession fears, monetary policy, trade wars?
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EURUSD Lows Not Seen Since April 2017
The world's most liquid currency cross made a notable move this past session - though the milestone was largely overshadowed by the fevered interest in the US political situation at present. While EURUSD didn't trigger a particularly large move on the day, it would nevertheless mark technical progress that draws some serious interest from technicians, policy officials and perhaps even Presidents. With Thursday's close, the exchange rate has eased tentatively through range support developed through September to trade at levels not seen in nearly two-and-a-half years.
Chart of EURUSD and Spot to 50-Day Moving Average Disparity (Daily)
Chart Created on Tradingview Platform
Fundamentally, this shouldn't come as a great surprise - especially given the measured pace with which the decline is unfolding. Looking at the benchmark measures of value used by the FX market at present, there remains a favorable bias for the Greenback. While economic activity in the US has slowed, the Eurozone is under recession watch with the ECB Economic Bulletin this past session highlighting trouble resulting from the divergence in course for the various member countries. The contrast in monetary policy is very similar. While the Fed has cut rats twice, the upper bound of its range is 2.00 percent while the ECB pushed its deposit rate to -0.50 percent and restarted QE at its last meeting. Even the threat of trade wars spreading to the US-Eurozone's relationship would support the prevailing trend (see what it’s done to the Chinese Yuan).
If we were operating on 'textbook' fundamentals, there would be little to dispute the momentum behind this very consistent trend from the past 18 months. However, current conditions carry greater complications then this simple formula would imply. We have seen over the past few months an louder and more consistent criticism over the level of exchange rates by US President Donald Trump. This pressure is the result of a confluence of factors between political opinion polls, the outlook for economic activity, conflicting strategies and unrelenting central bank. In essence, the trade wars have burdened the US economy which is showing in sentiment surveys. Fear of recession is translating into a drop in the President's approval rating and the Fed is not pursuing aggressive stimulus to 'compete' with global peers. This has raised the risk that the White House may find some means to devalue the Dollar to earn some economic strength at the expense of trade partners - consistent with the 'America First' agenda. Currency intervention is a dramatic move with extreme complications. Let's see just how distracting the 'impeachment inquiry' headlines are and whether they keep the President's focus away from the Dollar.
Trade Wars Headlines Don't Catch Fire, Monetary Policy Fireworks
Currency wars represent the threat of escalation beyond the more 'mundane' trade wars. As we await the possible evolution, there is still plenty developing on the traditional front. Despite the aura of enthusiasm US and Chinese officials are trying to create around the contentious trade relationship between two, actions continue to deviate from rhetoric. The United States move to slap sanctions on a Chinese shipping firm for their transporting Iranian oil was met with condemnation by the Chinese government. It is important to remember that while the economic sanctions applied against their counterparts may not have been raised recently, their plateau represents the peak of pressure historically. We will be reminded of that fact with the Chinese government's September PMI figures early next week, but this morning’s industrial profit figures may offer the more direct - and reliable - measure of the pain.
Chart Created on Tradingview Platform
As we await the trade wars to pass back into vogue among the masses, we remain readily preoccupied by the complications in monetary policy. The news that the ECB's Lautenschlaeger - one of the principal hawks at the bank - was retiring two years early is still resonating in the markets. Frustration that monetary policy is being applied as a cure-all seems to be more than a simple concern among the vigilant investor rank. This is a shift in balance for the ECB, but more importantly, it reminds us that even the central banks are buying into the belief that they can thwart all crises. To build upon this headline fodder, renowned Fed dove Neel Kashkari was on the wires Thursday suggesting it wasn't the central bank's responsibility to protect investors from their own poorly conceived exposure. While this should be obvious, hearing this reality from an official that has directly (perhaps inadvertently) supported speculative interests can be disturbing. Through the final session of this week, traders should watch for the US PCE deflator figures as it is the Fed's preferred inflation metric.
Beware Quarter-End Liquidity Conditions Converging with Recent Overnight Funding Pressures
As we head into Friday trade, traders should be mindful that we are wading into the second-to-last session of the month and quarter. There is significant liquidity turnover around the end and beginning of the quarters. Under truly normal conditions, this is not an issue as investors calmly roll their positions forward to exposure with a longer duration. Yet, these aren't 'normal' conditions. Recently, we have seen a surge in US repo rates and the search interest around overnight funding. What does this mean? For those that were active in the markets back in 2008, the financial crisis really touched off when liquidity dried up and the ability to exit the market and find harbor with over-subscribed havens led to distortions that sparked panic. We are not yet facing such extremes, but traders should beware. Recent demand for short-term funds in the US financial system can exacerbate the seasonal pressures. Add to this mix a persistent state of concern over numerous thematic risks and the recognition of dependency on monetary policy with a years-long build up in leverage, and we are left with a volatile cocktail.
In general, it is good practice at this stage to keep a wary eye on the state of risk trends in the broader financial market. Looking to the S&P 500 or Dow, we've experienced a pullback these past few weeks, but that doesn't draw us very far from the relative record highs this unique asset group has lingered around. It may be exceptionally difficult and therefor unlikely to drive these over-indulgent markets to further progress behind their established trends, but it is still the prevailing bearing. Find markets that are trading at a risk asset trading at a more substantial discount and always have a preferred 'risk aversion' option ready for the inevitable turn.
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