Long EUR/USD

Feb 7, 2020

For a longer-term trade idea on the weekly chart, I was looking at EURUSD from a fundamental perspective and the technicals would provide the right timing to get in. From a macro fundamental perspective, the FED has said that they are keen on keeping the 'liquidity' in the repo markets, so the continuation of the rise in the balance sheet will continue to weaken the dollar. Moreover, more rate cuts aren't being priced into the market yet, but I am certain there will be rate cuts in 2020 weakening the dollar. All that's currently keeping the American Equities markets up is the FED; in late 2018 we saw a drop in the American Equities, but for no fundamental reason, in late December the markets turned around, purely due to the FED stop the rate hikes, then after the steam ran out from that the markets went down in May of 2019, then the FED cut rates, and it was once again fine. As we can see the biggest driver of American Equities is the FED, so it will likely continue. The FED came to a crossroads where they could either save the dollar by raising rates, but the markets would go down, or they could rut rates and save the markets, but he dollar would go down; they choose the ladder. With this said the increase M2 money supply is reaching levels of almost 20% annually. The next question becomes where is all the inflation, since we aren't seeing commodity prices go up nor is the core or headline CPI catching on to this. The inflation is currently in the bond and equities markets, but that inflation will affect commodities making the consumer price index catch on to the inflation. As for proof of inflation in the equities and bond markets, one just has to look at the price to earnings ratio on equity and low/zero/negative yield on fixed income instruments. With this said the dollar has had a strong decade, and there is a strong thesis being made for deflation causing hyperinflation. We haven't had deflation, but still had a strong dollar, and if the QE program under Janet Yellen wasn't put in place then the low inflation could've turned in deflation. While many of this is also true for the euro, it has been priced in for the most part, while it hasn't for the dollar.

With the fundamental trade idea above the current falling wedge in the EURUSD gives us a good technical entry point on the weekly timeframe, and for a more precise entry, we can look for a cross on the 20 period SMA. The timeframe for this trade would be approximately 12-18 months.

If you would like more trade ideas, you can find my podcast, Alpha Action, on apple podcast and anchor.