EUR/USD ULTRA RESISTANCE AHEAD|THE CASE FOR THE DOLLAR

20 lug 2020

EUR/USD is now moving in an upward channel, facing the blue resistance area, yet no one is talking about the real resistance ahead of us, that is the 11 year downward trend line, that has so far worked like a clockwork, with only a slight violation attempt, in 2014.

Now, the cross lines that you see on the chart represent estimated touch point of a price and the resistance, depending on the speed of the price growth.

It is obvious, that the touch point is realistically to happen below 1.1600. Thus, 1.1600 Is THE resistance level. However, given a relatively gradual slope of the resistance line, the touch point will most likely be no lower than 1.1500

Many link the current surge in Euro to the FED cutting rates, thereby negating the carry trade benefits and what we see now is the capital flow back to Europe, spurred by the current FED's and Treasury's collective dollar liquidity pump. That leads the aforementioned "many" to go further and make claims of the end of the Euro downtrend, which naturally means that the downtrend line will be broken and Euro will break out shining and free.

While there is certainly some truth to that, here is the FED funds rate chart, that shows us the beginning of the Euro down-trend, after the FED cut rates to de-facto zero in 2008, while the Euro funds rate, while going down too, was cut to near zero only in 2015. Therefore, while there is certainly a relationship between the two, it is not the single factor issue.

As I have already said before, I am convinced, that Europeans realize how damaging is the strong Euro to the EU’s economy, and therefore, It would be reasonable to assume, that the ECB will do Its best to make sure the downtrend line stands. Once broken, It will take much more liquidity to get the ginny back into the bottle.

Also, I am convinced that the dollar is the place to be now, as all the investable assets are in this currency, and will be in the future. The dollar represents 70% of the global trade and global financial liquidity, so the current collective effort of the FED and the Treasury serve merely as a patch for the liquidity hole in the global finances.

And the last but not the least, the dollar demand is driven by the companies that are not US based and therefore lack access to dollars, as well as the governments, that do not have access to the FED’s dollar swaps program, but which have borrowed heavily in dollars during the weak dollar years, and are now facing dollar cashflow shortages due to the massive corona related slump in the global trade.

All the talk of the dollar being replaced or sidelined as a global reserve currency are facing the harsh reality:

As of the moment, there is not a single currency that has the financial market depth and sophistication to accommodate the worlds capital. The Euro is a currency of a zero growth continent, that is plagued by local debts, a coming banking crisis, and is a poly-country currency, which means that Euro is always under the risk of being hit by the exit or a default of one or many member countries, or even a complete blocks dissolution.

In that case, one, who has Euro-German assets finds himself with the Deutschmark assets and Euro debts on hand. A great position to be in. While one with the Italian assets, finds himself with the Lira assets and Euro debts on hand. An awful position to be in.

That persistent ambiguity makes Euro an unreliable harbor for global capitals. The common finance ministry and the common debt, it if becomes reality, will certainly boost Euro’s reliability, yet that is a double edged sword, due to the fact that further federalization will push more countries into the Euro sceptic direction, and each move to strengthen the EU and the Euro is a step towards its demise.

Chinese RMB can not be a global reserve currency, for many reasons. Among the many are the fact that there are no RMB asses that are available for non-chines entities, there is no rule of law to protect ones property rights, and China is still largely a developing country. Don’t be fooled by the splendor of the ex-Canton, or Shanghai. China beyond its mega cities on the coast remains a second tier country at best.
More developed than India, less developed than Brazil.

Japanese Yen is not big enough for such task, with only 126 million people, a third of the one of the USA. Besides, the country itself has been plagues by zero growth for decades, and is militarily indefensible in case of a war with China or Russia. Other economies are regional and are not worth consideration. The US remains the power that keeps the seas open for everyone, while allowing everyone to use its judicial system to protect their property right. And in exchange, we just have to use dollars. A low price to pay if you asked me.

A shift to the gold based transactions is the only somewhat viable alternative, yet the US has by far the largest gold reserves, which means that the Gold backed dollar will be the currency to use anyways.
Besides, the global security role and the global property rights body will remain in the dollar realm anyway.

Thus, as a convinced dollar bull I say that the level will stand strong, which gives all of us a gorgeous swing short opportunity on EUR/USD.

Please, tell me your opinion in the comments, I very much welcome an intelligent discussion.

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