EUR/USD – Bullish and Bearish Talking Points

Below is a list of items to help the average trader understand more completely what effects the price of EUR/USD.  These items are to increase discussion and do not necessarily reflect the views of or it’s owners.

Bearish Talking Points for USD

  • Trump can reshape the Fed’s policy, if he decides to bring more doves into the central bank
  • Investors are hedging their bets on the Fed, just in case they back down from their rate-hiking cycle
  • Money flow heading out to the commodity-based countries and emerging markets in search for higher yields
  • The US Treasury has significantly eased USD liquidity in the USD money market so USD has become cheaper due to this increased supply
  • Regulatory changes in U.S. money market, it may now be no longer advantageous to issue debt in U.S. dollars
  • With fixed income markets no longer exuberant about the prospect of US growth the dollar has lost its primary catalyst for appreciation
  • USD overvalued according to OECD
  • A depreciation of the dollar would reduce pressures on countries with fixed exchange rates and external debt.
  • The dollar is vulnerable to the idea of a trade wars
  • The dollar is vulnerable to the idea of China selling a big chunk of its dollar reserves
  • The dollar has started its 15 year super cycle decline

Bearish Talking Points for EUR

  • While much of Germany’s industry is competitive at stronger euro levels, the cost structure of other economies is not as favorable
  • ECB may delay the start of tapering until middle of next year on low inflation expectations
  • In Italy, each of the four main parties opposing the Democratic Party subscribe to the introduction of a parallel currency to rival the Euro
  • In Poland, there is rising tensions with the remainder of the Bloc over immigration and financial issues; leading some to say “an EU exit from Poland is absolutely possible”
  • The market will be more sensitive to a cut in the inflation forecast than an increase in the growth forecast
  • French, Italian and Spanish benchmark yields have declined
  • Macron’s standing in France is lower than Trump’s in the US
  • Europe still has not found a consistent way to clean its dirty financial laundry
  • EUR has probably benefitted from unhedged equity inflow and is vulnerable to a correction in equities
  • The Target2 system, designed to adjust accounts automatically between the branches of the ECB’s family of central banks, in reality, has become a cloak for chronic one-way capital outflows
  • Greece may not achieve the required target to qualify for a cash bailout

Bullish Talking Points for USD

  • The core of the FOMC expects three more hikes in 2018
  • China will stop requiring financial institutions to set aside cash when buying dollars through currency forwards
  • 2- and 10-year interest rate differentials begin trending back in the US favor
  • The US yield curve has steepened
  • The Fed’s dot plot is expecting rates to rise to a touch over 2% by 2018
  • The roll back of the Dodd-Frank Wall Street Reform Act
  • If equities roll over the USD could rise back in a furious kind of way
  • The USD is still more than twice as large in its use as reserve assets, or turnover in the foreign exchange market
  • Trump’s planned tax reform and aggressive fiscal stimulus
  • Verbal intervention by politicians into the currency market can backfire
  • The relative better health of the US financial system
  • Capital outflows from the Eurozone in 2016 have been the biggest in 14 years
  • LIBOR is rising is because money is being taken out of that offshore funding market and being put onshore in the US
  • The world is USD dollar starved and there is a shortage of offshore dollar funding -the Eurodollar maket
  • Higher interest rates in the US makes it cheap to hedge European or Japanese exposure

Bullish Talking Points for EUR

  • The risk of deflation has disappeared
  • Draghi risks interest rates traveling much higher
  • Flows out of the US and into Europe as a relative haven for US political uncertainty
  • Sentiment surveys shows EUR exchange rate was no impediment to economy
  • The capacity of Europe to build stronger economic and political relations with China, makes it appear as a relatively safe place to invest
  • Rising European yields are the latest shiny thing that traders can see
  • Many investment houses and journalists are talking up European equities and the euro as the counterpart to the unwind of the Trump trade
  • Diminishing election risk in Europe
  • The euro has increasingly become a funding currency (borrowing in euros to buy higher yielding assets)
  • The euro ist appreciating well before rates will actually go up again in the Eurozone
  • Eurozone is getting the same boost the US got from QE, just a few years later
  • With higher Libor clients may well decide to no longer seek a U.S. dollar loan, but instead a euro-denominated loan, or a loan denominated in their home country’s currency
  • Current account flows, valuation and positioning were supportive of the euro