Analysts Martin Enlund and Andreas Steno Larsen at Nordera Markets argue that the US economy will slow from here and but they believe that there are reasons to fade the EUR/USD rally, as i) a SOMA-day is coming up, ii) Trump buying Italian bonds is not necessarily a EUR positive and iii) a hawkish part of Powell’s speech was overlooked.
Key Quotes:
“One potential driver of the dollar which was often mentioned at the start of this year but oddly forgotten during the twin deficit scare was the idea of repatriation of capital to the US. Why oddly forgotten? When George Bush signed the ACA/Homeland Investment Act of 2004-2005 (which triggered repatriation of capital) it took a few months before the USD turned higher. The initial move after Bush signing the bill was that the dollar weakened(!). This example suggested that market participants were underappreciating the potential for a come-back in the dollar. Here we are, almost six months later, and the USD has picked up substantially.”
“The Donald seems keen to weaken the dollar, and he has seen his wishes fulfilled at least over the past week. Market participants has had to grapple with the President’s critique of the Fed’s rate hikes, about other currencies being too weak (CNY, EUR), a jump in perceived impeachment risks (dollar-negative because of its Keynesian growth implications) and the odd idea that the US could buy Italian bonds.”
“If the Trump-Conte alliance could achieve there are better ways to express this than in EUR/USD this fall. This is not EUR-positive (if you consider selling USD, By indicating the US could buy Italian bonds it encourages the Italian government ahead of its budget battle with the European CommissionThe US buying Italian bonds is an intriguing idea. It is generally thought that the White House is no big friend of the EU, and it would obviously be a bad idea to own Italian bonds if EU/EMU break-up risks were to rise. But the President would like to see a weaker USD, so that’s a definite positive (for him). The persuasion angle is the most interesting, if we assume the White House wants to break up EU/EMU. i) Lower BTP yields, ii) a broadly weaker USD (not necessarily versus EUR) and iii) EU-turmoil as the Italians are incentivized to spend more, then it looks like an alliance where both parties will gain.”
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