10.08.2020 – Special Report. The Sheriff is back in town: EUR/USD seems to be entering a resistance zone at around 1.17. A rebound seems overdue. This is due in part to the strong US labor market figures and the new support in the Corona crisis. But also the resurgent China conflict. Perhaps a gigantic short-squeeze is also imminent. In any case, Morgan Stanley has closed its short position on the dollar as a precaution. We’ll do a background check.
Tailwind for the US economy
Eine neue Dollar-Stärke könnte vor allem aus einer Erholung im US-Binnenmarkt erwachsen. Die neuen Figures from the labour market point to this: The US economy created 1.8 million new jobs in July and the unemployment rate slipped to 10.2 percent. The figures were better than expected.
At the same time, US President Donald Trump also provided a new tailwind for the US economy: in an executive order, he overruled the stubborn Democrats in Congress and ordered additional unemployment benefits of 400 dollars. At the same time, he extended the easing of the repayment of university loans and the protective regulations for evicting defaulting tenants. The Dems are now in a bind – if they appeal Trump’s move, they will be seen as the party that denies unemployment benefits.
Politics and the financial market
Already, the Democrats have lost approval because they blocked for weeks, demanding, among other things, stimulus for illegal migrants and, strangely enough, funds for the expansion of the error- and fraud-prone postal vote for their own $3 trillion proposal, the Heroes Act. It is no accident that the gap in opinion polls is closing. Currently, Biden is only 3 percentage points ahead of Trump at Rasmussen. Which makes the stock market happy and supports the dollar – because Joe Biden stands for new taxes, open borders, health care for all illegals, stopping the deportations of criminals. We recommend RealClearPolitics’ survey collection to anyone who wants to follow the political events. And here above all the figures from Rasmussen – the institute was the only one to be correct in 2016 with a fuzziness of 1 percentage point.
Power struggle with China
It is also possible that the dollar will strengthen against the euro, pound and franc in the future because of China – and this is because the greenback is always considered a safe haven in times of crisis. Because Trump is shooting the next poison dart in the direction of China: After fines amounting to billions, the president issued a decree prohibiting business with two of the largest IT companies in the People’s Republic operating in the US: ByteDance, the owner of the video app TikTok, and the WeChat operator Tencent. The White House fears that user data will go directly to the Communist Party. Tencent is Asia’s second most valuable company after Alibaba with a market valuation of the equivalent of 686 billion dollars.
We also recall that China has so far not fulfilled its obligations under the customs deal and is reluctant to buy from American farmers. The question is whether Trump wants to take action against Beijing before the US elections because of this, which is obviously waiting for the outcome of the presidential election.
First squeeze warning
According to Reuters, shortly before these developments, Morgan Stanley had already made an interesting announcement on Friday: The Greenback is the most oversold in 40 years. This increases the chance of an imminent reversal. That is why MS has closed its dollar short and long positions on the euro and the Australian dollar. According to the investment bank, its Combined Market Timing Indicator had triggered a sell signal for the first time since January 2018. A short squeeze for the dollar is also likely to be imminent, the short dollar trade is downright overcrowded.
Large short positions
Goldman Sachs had already made similar statements last Monday: In the week ending July 28th, non-commercial traders had sold 5.2 billion dollars net, up from 2.2 billion dollars the week before. This brought the net short positions of only these investors to 24.5 billion dollars. At the same time, asset managers had sold $6.3 billion against the euro, yen and pound.
Still, the Gold Men remained bearish lately – but Goldman Sachs is known for its tactical analyses that turn quickly and are sometimes countered by its own actions. However, Goldman Sachs warned that the dollar is 15 per cent overvalued and that the chance of outperformance in the US equity market against the rest of the world is diminishing. In addition, US real interest rates are likely to slide further into negative territory.
Is Europe catching up?
In fact, the euro had appreciated against the dollar when Europe launched a massive economic stimulus package of 1.8 trillion euros in the Corona crisis and announced joint liabilities on a large scale for the first time in history – Eurobonds with Corona camouflage coating, so to speak. This boosted expectations for growth and corporate profits. So the question is whether the pent-up demand for investments in Europe is already covered or not.
Our conclusion from this mixed situation: In the big pros and cons, you have to keep an eye on US policy and above all the customs dispute with China on the one hand, and on European economic policy on the other. And of course much, if not everything, depends on the Corona crisis. The question for the foreign exchange market is whether the economy in Europe or America will start up again in a stronger and more convincing way – and whether we will see a new wave or not. Whatever the case, speeches like that of Morgan Stanley are interesting indicators of what is happening in the currency market. Short squeeze in the dollar or not – the coming days will show. When other bears are fed up as well, the greenback will go up. The Bernstein Bank is keeping an eye on the matter for you!
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