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What’s lacking from our perspective is convincing evidence that the US economy is pulling materially ahead of international peers and that US exceptionalism is returning as the theme for the FX market. Set aside this there is still erratic US trade policy and untimely fiscal easing for the dollar to be concerned with.
That’s not to say that we aren't as focused as everybody else on the abrupt loss of momentum in the Euro area which has taken the index of data surprises in the region to the lowest levels since the banking crisis. But there the comparisons surely end and aside from the weather our economists find it hard to explain what it is that should cause the economy to behave as though it has hit a brick wall.
So while they acknowledge that the nowcaster has slumped from signaling growth of 3.5% to 2.0%, and potentially as low as 1%, they maintain their forecast for relatively robust growth of around 2.5% that more or less matches that of the US through the second half of the year (1Q’18 is cut by another 1% to 1.5%, 2Q’18 raised by 0.5% to 3%).
If this view is correct we see no convincing reason to abandon the forecast of a shallow EUR uptrend, nor sufficient reason to flip tactically short EURUSD, certainly not when the euro continues to be supported by a powerful underlying balance of payments dynamic (a basic balance surplus of 6% of GDP versus a deficit of 0.7% in Japan, 3% in the US and 7% in the UK).
EUR appreciation delays due to the eventual repatriation by the US corporates-EUR accounts for a 3rd of foreign profits and ECB policy normalization (change in QE guidance delayed until April).
Apart from this, the US President Donald Trump has been causing the world to hold its breath. Things can get really serious now should the conflict between the US and Russia over Syria escalate, as Trump threatened Russia on Twitter: “Get ready Russia, because they will be coming, nice and new and “smart”.
The break of EURUSD above the 2008 low at 1.2329 in January confirmed a game change in favor of a new, long-term bull-trend. But the internal structure of the whole rally off the 2017 low at 1.0341 is a big concern.
Trade tips: Sell 6M 30D EUR calls/RUB puts vs. buy 6M ATM straddles in EURUSD and EURCAD, in -1:0.85:0.85 vega notionals.
Currency Strength Index: FxWirePro's hourly EUR spot index has shown -85 (which is bearish), while hourly USD spot index was at 73 (bullish), while articulating at 05:53 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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