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Talking Points:

  • There are a number of fundamental themes exerting extraordinary market influence: trade wars; monetary policy; risk trends
  • With exposure to all of the themes and complications in its standing with them, EURUSD is a particularly difficult trade
  • While USDJPY certainly has connections to all the same themes, its sensitivity and probabilities promote a more direct view

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Fundamentals Can Complicate or Support Trades

Like gravity, attempting to ignore the importance of fundamentals in your trading does not absolve you from its effects. I am a firm believer that trades should be formed around strong technical analysis - particularly with regard to entry, exit and timing - but motivation is heavily determined by fundamental analysis. When a common motivation for market participants leverages value or undermines speculative exposure; the market not only snaps to attention, but it draws enough attention to fuel a meaningful trend. Yet, there is rarely a single fundamental theme at play in the market. There is a range of critical determinants to the value of markets and the flow of capital, but determining which carries the most weight can be a difficult task. Far more taxing is spotting opportunities where the fundamentals generally align behind the specific view for a market the multiple themes somehow don't interfere as an important theme develops. It is exceptionally different to fund such targeted interest in the market. That is as true today as it has through any other time in market history.

The Loaded Fundamental Themes Currently Driving Our Markets

In gauging fundamental impact, one of the important criteria for identifying force is establishing what can reach the widest expanse of the financial system. Presently, one of the most recognizable drivers in our markets is the escalation of a global trade war. The US and China have traded hefty taxes against each others' imports, but it was the US President Trump's threat of a rapid increase in the tab to the tune of $200 billion that risks turning an otherwise robust global growth into the early throes of recession. The more recent change in theater with the threat of a 20 percent tariff against European autos makes this a far more troubling affair. Another theme of extraordinary reach is the shift in monetary policy. Not only do divergent policy settings from the world's largest central banks generate volatility, but the collective normalization these banks are promoting threatens the advance won over the past years. And, then there is the most systemic element of all: risk trends. This is more a result of converging motivations, but it is maintains the greatest reach of all.

Fundamentals Support a USDJPY View but Hopelessly Complicate EURUSD

The Most Appealing Market May Also be the Most Risky

When seeking out trade opportunities, few FX markets look more enticing than EURUSD. The most liquid cross in the world speaks to many dominant fundamental themes and seems well motivated for clear trend development. Yet, where volatility seems an almost certainty over the coming weeks; the capacity to develop a sustainable trend is very unlikely. For this pair, trade wars represent a point of ever-greater uncertainty. When the conflict was primarily between the US and China, the Greenback seemed to suffer little fallout. Yet, with the US at odds with the largest developed world economy - and largest overall - recognition of the risk in collective retaliation has turned more mainstream. In monetary policy, it would seem that the situation was straightforward as one is at the extreme hawkish end of the curve and the other an absolute dove. And yet, the Euro rallied throughout 2017 despite the disadvantage. Finally there are risk trends. In a fully liquidity drain and panic, the Dollar is the most likely benefactor. Yet, short of this crisis-level shift, the Dollar is more and more at risk of losing its altitude.

Fundamentals Support a USDJPY View but Hopelessly Complicate EURUSD

A More Reserved Pair with a Clearer Path

In contrast to the convolution behind EURUSD, USDJPY finds much of its fundamental motivations readily align in favor of direction for the pair. Despite Japan's dependency on global trade and its struggles to regulate its local economy through monetary policy and the 'Three Arrows', the rise of trade wars has not provided a strong and direct move for this particular pair. Yet, given the wave of retaliation against the US for its provocations, the dollar carries the greater potential for a heavy and dedicated move forging a USDJPY retreat. In the balance of monetary policy, the BoJ is very unlikely to set a new bearing (dovish) anytime in the foreseeable future given weak inflation and the rise of systemic risks, but the Fed has much to lose in terms of enthusiasm given its remarkably hawkish contrast to counterparts. Even debate over the pair's haven preferences could spur questions. Both are well known safe havens, but the type of risk aversion we currently face and the extraordinary influences of trade wars are more likely to favor the Yen. We discuss the contrast in appeal between the EURUSD and USDJPY in this weekend Quick Take video.

Fundamentals Support a USDJPY View but Hopelessly Complicate EURUSD