EUR rallies on as Trump continues to cause a Greenback exodus
In recent weeks we have seen extreme futures position building in USD majors contrary to movements in yield spreads and underlying economic fundamentals. The best example of this has been EUR/USD. Some reporting has implied that the EUR is climbing because of an improved economic picture making it more likely that the ECB will tighten monetary policy. However, just last week ECB President Draghi made it clear the ECB intends to hold course for now but may consider a modest QE adjustment later in the year. Contrastingly, The Federal Reserve has remained committed to the gradual removal of policy stimulus; this policy divergence has seen the two year yield spread climb approximately 60% in the last twelve months in favour of the Greenback. So why is the EUR strong? Its position as a default alternate to the USD means the disaster that is the Trump administration has caused a massive bid by default for the Euro. The question is how long can this carry on? Even if the Trump administration is impeached, can they really down the US economy? The market position is already at historic extremes and a long position is expensive to hold if EUR/USD starts to loose upward momentum. The rally in Cable (GBP/USD) is also interesting, as we see BREXIT as having a much bigger impact on companies’ long term investment decisions re the UK economy than Trump in the US. Trump can be contained by the system, loose the house majority in less than twelve months and be gone completely in three years. BREXIT could undermine the UK’s economic position for the next two decades! The biggest market concern is the policy inertia regarding healthcare and tax reform. The American people are being incredibly disserved by their policy makers on both sides of the House and for now compromise still appears to be an alien concept. However, should this change beware of an aggressive recovery in the Dollar. The AUD took an aggressive step back on Friday following comments by Assist. Governor Debelle not to read too much into movements in a neutral rate from a policy perspective, The selloff may have a bit more to run, but broadly speaking we are looking to buy the AUD on dips.
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