EURUSD: a game of tennis

'15 love.

30 love.

30-15.

30-30.

40-30.

Game, dollar!'

Well, that might not always be the end of course but I have to show my desire of the euro to get trashed somehow.

What I'm going to chat to you about today is how focusing on one side of a currency pair equation is futile, and how the two currencies ebb and flow, with one side becoming more important than the other as time goes on...

And I've written on how I look at the ebb and flow below previously...

The best example of late is certainly with the euro.

Let's hark back to the summer.

We had many articles like the one above coming out.

Of course, that is largely one of the reasons why the euro rallied so heavily during the period...

It was largely dollar dependent, not euro dependent.

Then we had the all important Jackson Hole meeting at the end of August, where Powell signalled the change to average inflation targeting, putting a final piece of the dollar's puzzle into the mix.

What happened next was what shifted the narrative over to the euro.

Extreme euro buying had led to the rally into 1.20; this is an untenable situation for a central bank that is looking to push for much greater inflation (the ECB, that is - I'd argue the Fed aren't as concerned as the ECB would be in this case since they have had 'better' inflation over the last few years).

Lane came out with his comments - right when euro buying was at the extreme mentioned above.

Just to recap, here's what happened to the euro after those comments.

It fell, naturally since one of the ECB's top policymakers thought that the stronger currency would be a problem for the inflation goals of the central bank

Since, however, the view has been muddied, and I think until this is more clear, the battleground on the euro side is a tricky one since we need the clarity to be able to action a trade.

Bloomberg wrote on this lack of clarity just today, actually.

My view is that after the German inflation figure that came out last week, surely the message about the strength of the euro has to become a lot less foggy?

It's the lowest level in five years!

Not really that good for the aims of the central bank, is it?

And, even if the ECB are reliant now on a lot more German government spending - as signalled by Lagarde and her predecessor, Mario - surely the easiest way to maintain German exports is to signpost for a lower euro?

It's my thoughts that the ECB would want Biden in as president - and this is naturally where we shift back to looking at the US.

A nice topspin baseline hit.

Why would they want Biden?

Well, I think they'd be at less risk of being named a currency manipulator by the US and having tariffs imposed on them.

Of course, this isn't a bold statement - it's well known that Trump has been a threat to them on the trade front.

But a Biden presidency, in my view, would allow them to really signal that a lower euro is valid...

Alternatively, though, it doesn't necessarily mean that a Trump presidency will weaken USD.

In my view, the pro market narrative would continue, since the threat of tax rises would vanish.

Not only that, of course, we'd have to pay attention to what the general market condition is post election.

It feels to me as if we're back in a bit of no-man's land until we get that uncertainty out of the way, but I'd certainly be on the lookout for signposting from ze central bankers...

Because, I think the next big market narrative will be a currency war based on inflation.

This will much easier proliferate under a Biden presidency than a Trump one due to the less protectionist stance that Biden would take as outlined above.

So we will continue knocking balls back and forth in my view.

This acknowledgement that there are always two (or more) key narratives at play, but one currency's macro outlook becomes more important than another at different times is something I've spoken about before...

And we can do well to understand when one side has a slight bit more relevance to enable us to filter out what to look at.

And also to know when not to trade.

Funnily enough, although there's a tonne of newsflow right now, a lot of it ends up conflicting, so we have volatility, but the market shifting quickly against you when one headline drops.

Not really optimal for me, personally, although many people are good at trading like this.

Trump's positive diagnosis of the Corona Virus is a great example of a rabid close to the net volley occurring...

Is Trump fine?

Will he be discharged after two days?

Oh no, but a headline comes out saying his situation has deteriorated.

Are we waiting for the 5-7 day period where the condition worsens?

Nonsense for me, personally.

I prefer baseline rallies (ha) which last a while.