Marginal increase in perceptions of European hegemony

There is at least one alternative

The tariff theme is officially dead to me as the price action after the 25% tariff announcement on USMCA allies was a huge tell. The fact that USDCAD could not rally on a GFC-level negative event was one of the weirdest things ever and when markets do strange things, there is usually information there. The market is saying that the tariffs will be removed, or they are priced in, or both. We are moving on to new themes and tariffs have lost their relevance to FX markets for now.

Meanwhile, there was a blockbuster announcement from Germany yesterday and stimulus is coming in the form of defense and infrastructure spending. The numbers are large and the announcement came much faster than people expected from the sclerotic European bureaucracy. Interest rate differentials, which were already pointing to way higher EURUSD for ages, have made another gigantic leg higher.

I have been showing the hourly chart in recent notes, but I had to zoom out to the daily chart now because the move is so big. Note that rate diffs showed the way in Q4 2024 (red line moved first, then EURUSD dumped from 1.12 to 1.02) and now they moved first again. 1.10/1.12 should be the first stop. I added at 1.0984 target to the trade in Current Views.

An interesting thread running through the current narrative is a bit intellectual and structural for my liking, but still bears mentioning. This meme is a good heuristic to begin with it. The USD isn’t backed by nothing.

The implication is that US hegemony is partly a military thing. By acting as World Police and defender of the Rules Based Order (RBO), the US made its currency a symbol of neocon/neoliberal RBO supremacy. The US pivot away from this global philosophy and towards lower defense spending will probably save many American lives and avoid costly future foreverwars, but it also mildly reduces that feeling of unassailable American hegemony. Meanwhile, Europe is stepping in to fill the gap, so the consensus prior that Europe is a milquetoast, bureaucratic, and declining power gets a bit of an asterisk now and maybe that’s good for a small change in the perceived value of the USD vs. the EUR as a reserve currency? Again, this is ivory tower intellectual stuff—not a tradable thesis, but also not completely nonsensical.

Ultimately, my bullish EURUSD view rests more on interest rate differentials and the massive outperformance of EU equities, and less on the bigger picture geopolitical stuff which can often be interpreted whatever way your confirmation bias decides. One could easily argue that less military spending is good for the US deficit situation and will eventually be good for the dollar. But I won’t argue that right now because I’m bearish dollar.   :]

It is probably no coincidence that MAG7 earnings growth peaked, DeepSeek freaked everyone out, and the AI bubble got deflated at the same time as the USD peaked. It is reminiscent of 1999/2000, when a torrent of money flooded into the US and the USD became mega overvalued. Then, the money flowed out and the USD sold off throughout 2003, 2004, 2006, and 2007. 2005 was an exception due to repatriation related to the Homeland Investment Act. I’m not calling a 3-year bear market for the USD, but if you did, you could probably argue it pretty well.

Note that the USD peaked way, way after dotcom because that was the period right after the hatching of the EUR and the market was questioning whether the EUR was a soft currency like ESP, FRF, ITL or a hard currency like DEM. The low in EURUSD was put in by central bank intervention and then the BIG TWIN DEFICITS trade rocked and rolled as central banks diversified out of USD and into EUR, GBP, and everything else. This time, there is no such problem with the EUR. It’s cheap, and there will be plenty of fixed income assets to invest in as Germany will be issuing like mad.

Not FX

If  you enjoy buy the rumor / sell the fact trades, there is a crypto summit this Friday where the government will talk about its plan to nationalize part of the stock of various cryptocurrencies and altcoins. The vitriolic, disgusted reaction of the entire world, inside and outside crypto, to the weekend mention of XRP and ADA as part of the crypto reserve are triggering a walkback now as the emphasis looks like it’s going to be on BTC and not the other stuff. Michael Saylor is at the summit, so theory is that the market will run BTC and MSTR up into it and then they will both peak around 11 a.m. Friday. ETH, XRP, and ADA more likely to disappoint.

This would be a 5-star runup trade, but I don’t like it because I wonder if people are starting to believe that this government intervention and deregulation of crypto might be more likely to push people away, not attract new entrants. So, trade it at your own risk! That Reddit post at right sounds logical enough, though there is a different reason to forecast the death of crypto every year and I guess this is the latest one? Much as the use case / bull argument shapeshifts every year (It’s a currency! It’s decentralized! It’s a store of value! It’s a tech stock! It’s a—cough—the government is gonna buy it!) the apocalypse is always coming too (It’s a Ponzi! It’s only used for doing the crimes! FTX is the end!)

If you’re not hysterically bullish or bearish crypto… You’re not trying hard enough.

Another potential buy rumor/sell fact that’s a bit further out, that I like better: NVDA is hosting a quantum computing conference on March 20.

The public companies attending (other than NVDA) are QBTS, IONQ, and RGTI. They have all been mega beaten down, and while there is no reason to buy them right here right now, my guess is they will all rally into that event. LAES is another quantum stock on my radar, (quantum security) but I know nothing—I’m just trading behavioral patterns, not technological knowledge. IONQ buy zone is 18/22.

Final thoughts

Finally, note EURUSD was lagging the 2017 analog for a while but has now more than caught up. I used the same y-axis for both because EURUSD was at the same levels, pretty much. Have a well-supplied day