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#1 03-08-2020 16:54:28

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 2910
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EUR/USD: is the pair's rally over?

EUR/USD: is the pair's rally over?


The eurodollar pair has recently been the star of the forex trading world. It has been trading above 1.18 and has triggered widespread stops. However, at current levels, a higher euro is not only a burden to the Eurozone, but also a strong contender for dollar dominance.

The investment community seems to have turned its back on the USD. Global hedge funds have been betting on a bearish USD, as the global bearish bet on the USD has risen by over $4.9 billion only during last week's trading. This is the largest global short position on the USD in 2 years.

http://www.forex-central.net/forum/userimages/euro-speculative-positioning.jpg


The USD's liquidity continues to dwindle

What is curious is that the strength of the eurodollar came at a time when the liquidity of the dollar was actually shrinking. While the Fed is printing a lot of dollars, the Chinese central bank ends up building up foreign exchange reserves and buying Treasury bills.

The Treasury General Account (TGA) held by the Fed reached $1.79 trillion. The problem with this dollar "bazooka" is when and if it will be deployed. Specifically, in recent months, as the Fed has been printing dollars, the Treasury has been issuing debt at an even faster rate.

With the American presidential elections approaching, the Treasury may be using the pending dollar as a stimulus for the economy. But if this is not the case, and especially if the market considers that the increase in the TGA account will continue, the situation of the eurodollar pair will be reversed.

http://www.forex-central.net/forum/userimages/eur-usd-swap-spreads.jpg


For those who are not used to the way the eurodollar pair evolves, the above chart offers a relevant perspective. The red dot is from last week and reflects the spread between the eurodollar pair and the five-year swap rates since 2004. In other words, while the market seems extreme, it's not unusual for the eurodollar pair.

Last week's GDP figures revealed the economic disaster left by the virus situation in Europe and the US. The quarter to quarter data showed that the U.S. is doing much better than the Eurozone -9.6% in the U.S. versus -11.9% in the Eurozone.

In addition, in the countries most affected by the virus (France and Spain), GDP fell by 12.5% and 18.4% respectively.

However, despite the fall in the Spanish economy, the French will receive more money from the stimulus fund than the French - despite the fact that the stimulus fund is being built to fight the economic recession caused by the virus situation.

As this month is already underway, the eurodollar pair appears to be high at 1.18. The eurodollar pair is expected to reach the 1.19 level. In order to continue buying at such levels, investors are ignoring the bearish fundamentals that are building up in the face of further gains in the eurodollar pair.

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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