Will the japanification of Europe help the US dollar?

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With the daily chaos in Washington and the political and political uncertainty prevailing in the world's major financial centers, it's no wonder that guiding the currencies' direction is becoming a full-time job for many. This year's annual report & nbsp; TradeTech FX The conference brought together many foreign exchange professionals to discuss the direction of the US dollar against the G-10 and emerging market currencies.

At last week's conference, dollar bears cited many reasons why they believe that the dollar is too expensive compared to the euro, the yen and the pound sterling, and that it is likely to depreciate against these currencies later in the year.

• China is using all possible monetary, fiscal and banking stimulus tools to halt the slowdown in its growth rate; as a result, the Chinese renminbi (CNY) can appreciate against the dollar.
• the commercial war between China and the United States lasts longer than expected.
• the euro is used to finance the carry trade in emerging markets. In addition, the euro is used for hedges against Brexit.
• Current account and trade deficits in the United States must be reconciled with higher interest rates, tax increases and / or budget cuts.
• The euro, the yen and the pound sterling are undervalued, so they can appreciate against the US dollar.
• Many emerging market currencies may perform well against the US dollar, as the Fed is unlikely to increase rates more than once this year.

According to Steven Englander, Head of Research and Strategy at Rafiki Capital Management "Despite extremely positive news in dollars, no purchase in dollars would have been planned. As soon as the market returns to a positive tone, investors will buy emerging market currencies that were defeated last year. & Nbsp; The US economy is a stable economy, one of the most exciting we've seen in the last 50 years. It is growing at 2%, but it's not an exciting investor. "

Ulf Lindahl, A.G. Bisset Associates Director of Investments, explained very well to his audience that "fifteen-year money cycles exist and are repeated. The average gain of the euro in the rising phase was + 114%. The average duration of the ascending phase is about eight years. & Nbsp; I think the dollar will go down. & Nbsp; Against the dollar, other currencies are at their best in 30 years. It is the world economy that drives it. "He also pointed out how a number of G-10 currencies were undervalued against the US dollar." The pound sterling is undervalued at 27% and the yen and the euro are undervalued at 37% and 22%, respectively, and this cycle will be reversed. "

China's economic performance will help Asian currencies appreciate against the US dollar. & Nbsp; It is difficult for economists and market players to have a good reading of the situation in China because it is very opaque and the data is unreliable. & Nbsp; According to Win Thin, Global Head of Strategy at Brown Brothers Harriman, it is important to note what Chinese policymakers are doing with huge monetary and fiscal incentives. "It means that the government is very concerned. They fear that people will be very unhappy if the economy slows down. "Thin pointed out that it was the" most worried about China "in his career." The trade war has been going on for longer than anyone thought. " is not a disaster, but we must be careful. "& nbsp; According to him, "China should not implode. He'll manage.

The dollar bulls, however, strongly argued that the dollar was really the only name of the game and cited the following reasons in support of their position.

• The dollar is a reserve currency held by many central banks and other financial institutions.
• All products are in dollars.
• The dollar is benefiting from the very good economic situation in the United States, or in case of problems elsewhere, there is a flight to safety. The US dollar is like the Swiss franc, a safe haven currency.
• S. is now an energy exporter, which places him in a very strong position economically. Europe is an energy importer.
• Although US growth is likely to slow, we are not in a recession and few economists are predicting it soon.
• Data from continental Europe show that the eurozone is barely escaping recession.
• In Europe, banks have not fully recovered from the financial crisis in the same way as US banks. As a result, the euro will weigh on the US dollar.

Alessio De Longis, Vice President of OppenheimerFunds "The japonification of Europe is here. The euro no longer behaves as before. The European Central Bank (ECB) has exhausted its arsenal of monetary policy. "Like many other dollar bulls, De Longis pointed out that the ECB had" no more leeway to relax. Europe is on the edge of a recession and the European financial sector is in ruins. "

For Marc Chandler, Managing Partner and Chief Market Strategist at Bannock Burn Foreign Exchange, "Exchange rates are a good way to take into account market sentiment. Almost all emerging markets [EM] the currency has abandoned the FOMC position [Federal Open Market Committee] gains. The low interest rate is not enough for the recovery of emerging markets. I have questions about growth in the United States, Europe, China and Japan. "Given the global slowdown, low interest rates in the US and Europe will not be enough to push emerging market currencies up against the dollar.

Chandler also explained that he was optimistic about the dollar because "the United States has been the first to enter the financial crisis and is the first to get out of it. This discrepancy is not over. Bad weather in the United States hurt the first quarter. However, the closure of the government is over. "He is also convinced that the trade problems with China and Brexit" will be solved. "

With all this information, it is important to consider what should be done with currency portfolios. & Nbsp; Chandler advised his clients to "hedge their claims in euros based on volatility and forward pricing". & Nbsp; Lee Ferridge, Head of Foreign Exchange Strategy at State Street Global Markets, was "negative on Australia. It's a high beta currency. Housing prices have risen and the trade situation between the United States and China has not yet been resolved. It will hurt the Australian against the dollar and the yen. "

Andrew Busch, former head of market information at the Commodities Futures Trade Commission, said that he "does not like emerging markets, the Brazilian real and the Russian ruble smell bad".

Robert Savage, CEO of CCTrack Solution was unequivocal that the dollar is the name of the game. "There is a high risk of intervention from the central bank to limit the rise of the dollar," he also said, no matter the outcome of US-Chinese trade negotiations: "Trump will declare victory and pass; he did it on other issues. "

"There is no real currency in competition with the dollar," he said. Ben Emons, Portfolio Manager at Intellectus Partners. "The central banks have tried to move away, but the results have been minimal." & As for De Longis, Emons believes that "Europe is moving towards Japanification; the yields showing that. Europe can not leave the trajectory of Japanification. "

An informal poll at the TradeTech FX conference showed that the majority of participants were bearish against the dollar, but the bulls persuaded me to lean. I have been attending and presenting at this conference for five years and I must confess that I am already looking forward to TradeTech FX 2020 being able to exchange views with such diverse conference attendees from around the world.

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With the daily chaos in Washington and the political and political uncertainty prevailing in the world's major financial centers, it's no wonder that guiding the currencies' direction is becoming a full-time job for many. This year's annual report TradeTech FX The conference brought together many foreign exchange professionals to discuss the direction of the US dollar against the G-10 and emerging market currencies.

At last week's conference, dollar bears cited many reasons why they believe that the dollar is too expensive compared to the euro, the yen and the pound sterling, and that it is likely to depreciate against these currencies later in the year.

• China is using all possible monetary, fiscal and banking stimulus tools to halt the slowdown in its growth rate; as a result, the Chinese renminbi (CNY) can appreciate against the dollar.
• the commercial war between China and the United States lasts longer than expected.
• the euro is used to finance the carry trade in emerging markets. In addition, the euro is used for hedges against Brexit.
• Current account and trade deficits in the United States must be reconciled with higher interest rates, tax increases and / or budget cuts.
• The euro, the yen and the pound sterling are undervalued, so they can appreciate against the US dollar.
• Many emerging market currencies may perform well against the US dollar, as the Fed is unlikely to increase rates more than once this year.

According to Steven Englander, Head of Research and Strategy at Rafiki Capital Management "Despite extremely positive news in dollars, no purchase in dollars would have been planned. As soon as the market becomes positive, investors buy currencies from emerging markets that were battered last year. The US economy is a stable economy, one of the most exciting we've seen in the last 50 years. It is growing at 2%, but it's not an exciting investor. "

Ulf Lindahl, A.G. Bisset Associates Director of Investments, explained very well to his audience that "fifteen-year money cycles exist and are repeated. The average gain of the euro in the rising phase was + 114%. The average duration of the ascending phase is about eight years. I expect the dollar to fall. Against the dollar, other currencies are at their best in 30 years. It depends on the global economy. He also pointed out how a number of G-10 currencies were undervalued relative to the US dollar. "The pound sterling is undervalued at 27% and the yen and the euro are undervalued at 37% and 22% respectively. This cycle will be reversed. "

China's economic performance will help Asian currencies appreciate against the US dollar. It is difficult for economists and market players to understand what is happening in China, because it is very opaque and the data is unreliable. According to Win Thin, Global Head of Strategy at Brown Brothers Harriman, it is important to note what Chinese policymakers are doing with huge monetary and fiscal incentives. "It means that the government is very concerned. They fear that people will become very unhappy if the economy slows down. Thin pointed out that it was "the most worried for China" in his career. "The trade war has lasted longer than anyone thought. This is not a disaster, but we should be cautious. "According to him," China should not implode. He'll manage.

The dollar bulls, however, strongly argued that the dollar was really the only name of the game and cited the following reasons in support of their position.

• The dollar is a reserve currency held by many central banks and other financial institutions.
• All products are in dollars.
• The dollar is benefiting from the very good economic situation in the United States, or in case of problems elsewhere, there is a flight to safety. The US dollar is like the Swiss franc, a safe haven currency.
• S. is now an energy exporter, which places him in a very strong position economically. Europe is an energy importer.
• Although US growth is likely to slow, we are not in a recession and few economists are predicting it soon.
• Data from continental Europe show that the eurozone is barely escaping recession.
• In Europe, banks have not fully recovered from the financial crisis in the same way as US banks. As a result, the euro will weigh on the US dollar.

Alessio De Longis, Vice President of OppenheimerFunds "The japonification of Europe is here. The euro no longer behaves as before. The European Central Bank (ECB) has exhausted its arsenal of monetary policy. "Like many other dollar bulls, De Longis pointed out that the ECB had" no more leeway to relax. Europe is on the edge of a recession and the European financial sector is in ruins. "

For Marc Chandler, Managing Partner and Chief Market Strategist at Bannock Burn Foreign Exchange, "Exchange rates are a good way to take into account market sentiment. Almost all emerging markets [EM] the currency has abandoned the FOMC position [Federal Open Market Committee] gains. The low interest rate is not enough for the recovery of emerging markets. I have questions about growth in the United States, Europe, China and Japan. Given the global slowdown, low interest rates in the United States and Europe will not be enough to push emerging market currencies against the dollar.

Chandler also explained that he was optimistic about the dollar because "the United States has been the first to enter the financial crisis and is the first to get out of it. This discrepancy is not over. Bad weather in the United States hurt the first quarter. However, the closure of the government is over. "He is also convinced that the trade problems with China and Brexit" will be solved. "

With all this information, it is important to consider what should be done with currency portfolios. Chandler advised his clients to "hedge the claims in euros based on price and forward volatility". Lee Ferridge, Head of Foreign Exchange Strategy at State Street Global Markets, was "negative on Australia. It's a high beta currency. Housing prices have risen and the trade situation between the United States and China has not yet been resolved. It will hurt the Australian against the dollar and the yen. "

Andrew Busch, former head of market information at the Commodities Futures Trade Commission, said that he "does not like emerging markets, the Brazilian real and the Russian ruble smell bad".

Robert Savage, CEO of CCTrack Solution was unequivocal that the dollar is the name of the game. "There is a high risk of intervention from the central bank to limit the rise of the dollar," he also said, no matter the outcome of US-Chinese trade negotiations: "Trump will declare victory and pass; he did it on other issues. "

"There is no real currency in competition with the dollar," he said. Ben Emons, Portfolio Manager at Intellectus Partners. "Central banks have tried to move away, but the results have been minimal." Like De Longis, Emons believes that "Europe is moving towards Japanification, yields showing that, Europe can not get out of the path of Japanification."

An informal poll at the TradeTech FX conference showed that the majority of participants were bearish against the dollar, but the bulls persuaded me to lean. I have been attending and presenting at this conference for five years and I must confess that I am already looking forward to TradeTech FX 2020 being able to exchange views with such diverse conference attendees from around the world.