Thanks Andrew for you comments. 1. Agreed, the twin deficit story has been around for a while and may have been priced in by investors. However, as Paul Tudor Jones mentioned it in a recent CNBC interview, the US unemployment rate sits currently at 3.8%, its lowest level since 2000, when the country was experiencing a 2.3% fiscal surplus. Today, it is running a 4% deficit, which is expected to increase to 6% to 7% in the coming years on the back of a rise in LT interest rate. Therefore, I just wanted to emphasize that the higher IR differential may play against the USD as investors will tend to focus more on the fiscal deterioration due to higher interest payments. Hence, the trend should ‘naturally’ be higher on EURUSD. 2. Agreed, currencies can potentially remain undervalued / overvalued for a while before converging back to their ‘fundamental’ value . However, I have noticed that when a currency is sharply undervalued for instance, as soon as the macro or political situation of the economy improves, the speed of the recovery increases. For instance, look at Cable in Q4 2016 and 2017. The currency got massively oversold post referendum on a back of an elevated political uncertainty. However, as soon as the situation eased in the first half of 2017, the pound started to rise sharply, soaring from 1.20 in January 2017 to 1.44 in April 2018 (until the recent USD appreciation). One way to measure political uncertainty is to use the EPU index developed by Bloom Baker and Davis, which is a text search method using leading newspapers that contain a combination of three policy-relevant terms. 3. The weak EZ growth topic has always been on the table. I don’t think that the growth differential has been a major driver of the EURUSD exchange rate over the past few years. I remember of a global macro presentation somewhere in Q3 2012, in which the title for the Euro Zone economy was ‘The sad endless love story’. They were mentioning the slow growth in addition to the political uncertainty in the Euro zone as potential threats for the Euro. However, the Euro rose from 1.20 in late July 2012 to 1.40 in May 2014… What caused the rally can be discussed, however three major forces were identified during the rally in 2013: - Narrowing spreads between core and peripheral countries (i.e. Germany vs. Italy or Spain) - An increasing Fed-to-ECB balance sheet total asset ratio. While the Fed announced QE3 in September then December 2012, purchasing a total of $85bn Treasuries and MBS per month, the ECB balance sheet was shrinking on a back of early LTROs reimbursements by banks - Widening current account differentials. Current account went back into surplus in 2011 in the Euro Zone, while it remained a 2%+ deficits in the US.. 4. I completely agree with the EM carry unwinds and Dollar funding. I guess in a 10M interview, the amount of information concerning your trade has to be limited, so that the viewer absorbs the direction of your trade, a couple of major forces explaining your positioning, and a major threat that can make the trade move in the other direction. One important thing about the Taper tantrum though is that the 10Y increased due to a rise in the term premium (Adrian, Crump and Moench), which increased from 60bps in May 2013 to 150bps in Mid-september, levitating the 10Y yield from 2% to 3%. The expected real interact rate remained sort of flat oscillating at around 1.5% during the same period. Something needs to be studied around that to see the impact of the US TP vs. EM FX and flows… 5. Same point here, when you mention EM, I think it is important to distinguish EM countries with large external debt position with a large proportion of debt issued in foreign currency (vs. EM countries with low external debt position and low proportion issued in foreign currency) to see the impact of a stronger US Dollar. Thanks again for all your points, and I am always open for debates.

Thanks for your reply Yvan! I totally get your points re. 1, although I still think that the twin deficit story will take a long time to play out and can be overshadowed by other concerns. For sure it should lead to the slow decline of the $ in time. 2. Is the macro and political situation improving in Europe? Expectations were super elevated last year amid "global synchronised growth" and an EM boom that really benefitted European trading nations such as Germany. Coupled with the twin deficit story post-Trump's fiscal reforms, this saw EUR:USD hit 1.25 early this year. Since then, however, we have seen a regime change imo as political risks return to Europe, PMIs weaken, and EM (China) growth has peaked. So the question then is this: can there be a repeat of 2017? It appears things are going the other way. 3. You mention spreads and balance sheets, but these too are moving in favour of Euro weakness - i.e. we are likely to see core-peripheral spreads widen, while the US balance sheet IS shrinking while ECB still adding liquidity, albeit more slowly. I do take the point that none of the ECB moves have been as priced as the Fed, however, and so think this could see a short-term bid for the EUR. 4. Agreed on EM, and I will look at the term premium in more detail as I think that's key. I'm just worried - but not convinved - that contagion could spread because there has been less and less breadth in the EM FX sell-off. Suggests that a lot of these portfolio flows are very fickle, and if things get bad enough then that RoRo mentality will see investors fock back to US and USTs. Finally, the US BS has had a direct impact on UST outflows (to carry trade destinations?) and so I think the BS unwind could see some of this return. We can debate how much impact this actually has (Powell thinks none, others are being very apocalyptic), but the fact that central bankers in Indonesia and India are raising alarm is concerning. Agree with many of your points tho. I definitely think the next decisive move could prove pivotal in the near-term. The worry is that if the USD does eventually breaks higher the, as the reserve/funding currency, you will see that virtuous cycle begin to build and the rally will become self-reinforcing, especially as global growth slows. At the same time, EUR could potentially face a lot of political risks that could upend any rally. Be interesting to see how it plays out with so much riding on this cross!

Thanks Andrew for sharing your thoughts again. 2. I don’t think that the macro and political situation are improving in Europe, and that probably 2018 is going to be more disappointing in terms of economic growth and uncertainty.. However, growth differential between US and EZ has not been a key driver of EURUSD over the past few years, therefore we could have a scenario where growth slows in Europe with hard data catching up with the disappointing soft data, while US growth remains robust (potentially 6% nominal growth for 2018), and we have a EURUSD trending higher (back above 1.20).. 3. Agreed, I mentioned the Balance sheets ratio and spreads between core and periphery as two of the main drivers of the July 2012 – May 2014 Euro bull story. However, I emphasized that the current account and inflation rate differentials will tend to weigh more on the US Dollar in the current environment. Concerning the central banks, the Fed moves are largely priced in as you mentioned whereas the ECB monetary policy trajectory is still ambiguous.. I don’t see the late speech as a turning point on the Euro.. Draghi’s comments on interest rates send up the Euribor futures, hence lowering market expectations of a first hike in mid-2019.. sending the Euro lower… 4. Agreed on your Indonesia and India point… Yes, there are many concerns that could send the USD to higher levels and therefore creating a self-reinforcement process as you mentioned.. There are so many ways to ‘hate’ the Euro at the moment (looking at slowing fundamentals, political uncertainty, low interest rates, ‘dead’ equity market despite a 2.5tr EUR increase in the ECB balance, divergence between European regions – especially in Italy- spreading populism across all countries….), however it looks like it is currently interesting to be on the other side of the current market trade (i.e. long USD) The Euro behaviour constantly changes and may sometimes surprise investors… For instance, during the ‘Black Monday’ session in 2015 (August 24th), the VIX Index soared above 40 and one of the surprising assets rallying was the Euro. On that day, EURUSD surged above the 1.17 level, up 350 pips in a few hours, acting as the ultimate safe haven currency during that sell-off.. Best Y

hahaha still smiling at that one

Fair enough, but: 1. Why? 2. What's your timeframe? 3. What's your target? 4. What's your stop?

Can you please elaborate as to why a weaker Euro/stronger USD puts out EM fires. I thought the risk of USD shortages puts more pressure to USD based EM debt. Thanks.

Brent Johnson bullish thesis relies on international flows going into the US. I have serious doubt about that as the world is basically long dollar at the moment. Japanese investors holds a record long US positions, the SNB is massively long, pension funds are long. in other word It is hard to understand where those international flows will come from. On the other hand china is opening up and their capital markets and will compete aggressively for flows. In the short term the 4 Morgan Stnaley 4 factors model (eco dispersion, commo, relative YC, PBoC) is pointing toward a weaker dollar as well as the pick up in chinese PMI and South Korean exports.

Alex Gurevich & Felix Zulauf also has have interesting Long Dollar point of views. Alex mentions that US dollar can stregthen in both market upside or market downside cases so going long dollar is a great risk-reward trade.