THIS ALONE - One of the points about the outlook in currencies and more specifically relating to the US Dollar against the Euro and Pound, is the point that if we strip out all of the things the market has been focused on, there is still plenty of justification to expect the Dollar to be on a path where it could be headed lower over the medium to longer term. I say this because if we just look at the cycle of things, we can see that the Euro had traded up to a record high of around 1.6000 in 2008 before going through a sustained period of decline to a fresh 17 year low in January of 2017. This was a very big drop that already should have been warning of the possibility for a shift in the cycle that would start to favor the Euro again. And the exact same can be said for the Pound. This is a currency that dropped down to a +30 year low below 1.2000 in October of 2016, after having traded up above the 2 handle in 2007. And so, if we just look at the cyclical nature of things, on this merit alone, both the Euro and Pound should be in positions where there is greater risk to the upside.
THE CHARTS - Moving on, when I look at markets this week, I see it all boiling down to developments on the trade war front. My expectation after last week's ECB decision is that we will continue to see things escalate on this front, which does not bode well for risk assets. This is something that could easily trigger an already overdue capitulation in the stock market. I think a takeaway here, which i indirectly allude to above, is the fact that while I do see the Euro and Pound outperforming over the medium to longer term, I think risk correlated currencies that may have benefited from soft Dollar policy, will be less inclined to benefit, with a reduction in risk appetite and exodus from stocks to also weigh on these correlated currencies. So I do see the possibility for a bit of a divergence here, which has the major currencies (including the Yen and Swiss Franc) doing well, but the commodity bloc and emerging market currencies under pressure. As far as the right now goes, the only trades I see out there as possibilities into Tuesday are the same as I have been talking. I like buying AUDNZD, buying GOLD and selling USDJPY. But none of these have set up just yet and I am sitting back patiently to see if they do.