I believe that $EURUSD is about to return to $1.10 from whence it came. A thread. 1] First I want to acknowledge I've been an extreme dollar bear. My reasoning was essentially that the Fed cancelled defaults of EM countries with its swap lines and China had to diversify from USD
2] This was supported by Angela Merkel and Macron highlighting the strategic importance of China, especially in the backdrop of Brexit negotiations. This trend appears to have reversed in recent weeks with Europe taking a harder line towards China re: network infra.
3] To those who remember EUR bull markets, there are usually 3 drivers. First - Chinese reserve diversification. Second - oil country reserve diversification from profits. Third - a lack of threats to European fiscal and monetary solidarity. Recently, all 3 of these looked good
4] China & Europe were 'strategically' partnering. A Biden based reduction in US oil output would push Brent crude higher giving Middle East a USD surplus to push into EUR. There was a great Kumbaya re: Macron and Merkel pushing for unified budgets & German stimulus.
5] Now things are cracking around the edges. Let's start with a chart of European equity performance versus the US. Europe's extreme regulation and inefficiency has resulted in a 5-10 year equity underperformance which just took out the lows after a brief bounce. This is bad.
6] What is worse is that in recent week German's finance minister Scholz has put a timeline on stimulus to 2022 at latest. German equities are now back at the highs vs Italian equities - and as Soros noted, Fratelli d’Italia's Giorgia Meloni is an extremist worse than Salvini.
7] Thus the ECB's unprecedented actions to narrow sovereign spreads looking ineffectual at actually helping Italy catch up to Germany, which will embolden Meloni who will in turn prove the Frugal 4 correct. The chart below shows that the ECB is now out-printing the Fed in July
8] The nail in the coffin, is of course, Trump's move in betting markets to near 50-50 in the backdrop of China buying US agriculture products. The US shale industry supplying China and Europe would be a huge USD positive. Chinese reserve diversification would go out the window.
9] To tech companies, who now drive markets - Europe's only hope would be gaining a foot hold in network infrastructure and regulatory diversification from the US to access Chinese markets. A Trump victory with a benign China in the backdrop is a worst case scenario for this hope
10] I believe Friday's price action was a capitulation move given yen crosses surprising with Abe's surprise resignation, and that the move will truly begin on Sunday night in an aggressive fashion. See you all on the New Zealand open.
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