Macro Trade Pitch

Individual Presentation
Steven Li
Phi Gamma Nu New Member
Introduction
1 million euros
Short
Agenda
EUR USD

Long
Hedge Sizing

Bullish USD
Hedge by shorting
DXY Futures Bearish EUR
DXY Futures
Technical Overview
The U.S. Dollar Index (DXY)
futures benchmarks the value of
Risks
the U.S. Dollar relative to the Euro,
Yen, Pound, Canadian Dollar,
Swedish Krona, and Swiss Franc

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

 Dynamic Hedging
Exponentiated Moving Averages – EUR/USD
1.4

1.35

1.3
EUR/USD DXY
1.25

Now 65% 35%

1.2

1.15 50 Day MA 70% 30%

1.1
100 Day MA 85% 15%
1.05

Last Price EMAVG (10) EMAVG (50) EMAVG (100)

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

 USD Historic Performance
U.S. Dollar Index
125.0000
124.0000
123.0000
122.0000
121.0000
120.0000
119.0000
118.0000
117.0000
116.0000
115.0000
2017-04-06 2017-07-06 2017-10-06 2018-01-06 2018-04-06

Trump Administration Super Cycle Decline Outward Flow

Treasury Secretary Steven Mnuchin
and Donald Trump has been talking
down the dollar because they favor
a weak currency. A weak dollar
benefits multinational companies
because it increases profits of
exports.
Introduction
The dollar is following an accurate
15-year cycle that began in 2008
and has peaked in early 2017. This
is due to not only the European
recovery but also because the U.S.
business cycle is more advanced
than Europe.
Historicals USD Outlook EUR Outlook
Economies strengthened for EU
and Japan in the last year. The
dollar has weakened as flows
increased into the euro and yen.
Central banks in Europe and Japan
are looking to remove their own
accommodations.
Technicals Risks
 EUR Historical Performance
EUR/USD Exchange Rate
1.2600
1.2400
1.2200
1.2000
1.1800
1.1600
1.1400
1.1200
1.1000
1.0800
1.0600
2017-04-06 2017-07-06 2017-10-06 2018-01-06 2018-04-06

ECB Focus on Growth Economic Strength Weaker Rivals

Mario Draghi, the president of the
European Central Bank, is focused
on growth and his emphasis on a
strong euro is interpreted as an
indorsement for the EUR to rise.
EBC is projected to slow the pace
of it’s quantitative easing.
Introduction
Economic growth increased by Euro’s two biggest rivals are the
2.5% in 2017 for the European dollar and the pound. The dollar
Union, surpassing the 2.3% has weakened and the pound has
expansion of the United States in been under pressure after Brexit,
2017. dropping 18% against the euro
since 2016.
Historicals USD Outlook EUR Outlook Technicals Risks
 Bullish Outlook for USD – Interest Rates
Hawkish Fed 10-Year Treasury Yield
2.90
The United States Federal Reserve has started to 2.80
raise short term rates and will continue in the 2.70
2.60
following years. It aims for a rate of nearly 3% in
2.50
2020 and beyond. To combat the 2008 recession, the 2.40
Fed increased its balance Tsheet to 4.5 trillion dollars 2.30
in mortgage-backed securities and treasury bonds. 2.20
2.10
The Fed is now unwinding its balance sheet which 2017-03-01 2017-06-01 2017-09-01 2017-12-01 2018-03-01
will force markets to buy more bonds and increase
interest rates. Strong Dollar
High interest rates increase demand for USD from
banks. The demand for the dollar will create upward
Target Inflation pressure for it and appreciate against other
T appreciates in a strong
currencies. The dollar also
The Fed in their meeting last month displayed
economy, as wage increases causing a rise in
confidence in reaching 2% inflation, which helps
spending and overall consumption.
economy grow at a steady rate.

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

 Bullish Outlook for USD – The Carry Trade
Carry Trade Definition
When investors borrow currencies at a low interest rate and exchange them for U.S.
Dollars or a currency with high interest rates on bonds. They profit by receiving high
interest rates on money invested and pay low interest rates on money borrowed

Japanese 10-Year Bond Yields EU 10-Year Bond Yields

1.000 3.500

0.800 3.000

0.600 2.500
2.000
0.400
1.500
0.200
1.000
0.000
2013-03-01 2014-03-01 2015-03-01 2016-03-01 2017-03-01 2018-03-01 0.500
-0.200
0.000
-0.400 2012-01-01 2013-01-01 2014-01-01 2015-01-01 2016-01-01 2017-01-01

Yen Carry Trade Euro Carry Trade

There is monetary stimulus in Japan aimed to produce ECB reports that banks are able to withstand ultra low
a cheaper Yen to curb inflation at 2%. BOJ declared interest rates for a decade, and plans to keep its low
that that they have no plans to increase interest rates. interest rates until late 2019, at the earliest.
Introduction Historicals USD Outlook EUR Outlook Technicals Risks
Bullish Outlook for USD – Tax Repatriation
What is Tax Repatriation?
Tax repatriation is the tax imposed by the United States on the return of money that
multinational corporations have stored overseas. Corporations are required to pay taxes on
profits made domestically, but not abroad. This encourages corporations to store assets overseas
to defer paying U.S. taxes.

Federal Tax Reform

The Government wishes to provide a tax break to large multinational corporations to use their
foreign earnings to create more American jobs and and expand operations in the U.S. Congress
estimates that there are 3.5 trillion dollars of untaxed earnings overseas. Republicans plan to
tax companies a one time lower rate of 12% as opposed to the traditional 25% tax rate.

The Dollar Strengthens

WSJ predicts over $400 billion to be brought back by companies. This involves the sell-off of
foreign holdings and purchase of assets tagged by dollars. Historically, the dollar appreciated in
2004 when President Bush passed the Homeland Investment Act, a similar reform.

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

Bullish Outlook for USD – Safe Haven Asset
What is a Safe Haven Asset?
Safe Haven Assets are investments that are expected to
retain and even increase in value during times of market
and financial turbulence. Investors turn to Safe Havens
to limit their losses in the event that market downturns
occur.
U.S. Dollar - Safe Haven
U.S. Dollar has been the perceived Safe Haven Asset for
over 50 years. During times of uncertainty, the US dollar
strengthens against other major currencies. In 2000 –
2002 Market Crash where S&P 500 declined 50%, the
dollar appreciated by 8%. In the 2007 – 2009 Market
Crash the dollar appreciated by 27%.

USD/CNY Effects of Trade War

6.3100
Trade tensions between the United States and
6.3000
China have been a point of concern for the
6.2900
global economy. USD/CNY data shows that the
6.2800 dollar appreciated relative to the yuan ever since
6.2700 the rise of trade war concerns, gaining from 6.27
6.2600 to 6.31. China has been studying the affect of
2018-03-26 2018-03-29 2018-04-01 2018-04-04 2018-04-07 yuan devaluation as a tool for a trade war.

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

Bearish Outlook for EUR – German Politics
Coalition Uncertainties
After weeks of talks on forming a new
government, a coalition was created
between Angela Merkel’s Christian Alliance
(CDU – CSU) with the Social Democrats
(SDP). However, there is uncertainty with
SDP’s leadership as their president
resigned, and the coalition agreement could
be jeopardized.
Rise of AfD
Recently, there has been a rise of the AfD
party, which is heavily anti-immigrant and
anti-Islamic, and passed SPD to become
Germany’s second most popular party after
taking 12.6% of the votes in the 2017
election. It’s a radical party formed only in
the last 5 years and is heavily inexperienced
politically.

The Euro Weakens

Germany is the largest economy in the EU, and the de facto leader of the EU. Instability
in Germany plays a significant factor in the direction of the Euro. Merkel, arguably
German’s most successful political leader of recent history, is upon her final term as
Chancellor and rise of anti-immigration parties indicates a worrying trend among
European countries.

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

Bearish Outlook for EUR – Dovish ECB
Historical Precedence
ECB consistently attempt to use verbal
intervention to depreciate the euro when it’s
become too expensive. Former ECB
President Trichet, has used verbal strategies
through 2004 and 2007 to curb EUR/USD
advances. Central bank statements have the
power to induce movement in the currency
market as the financial world listen in on
clues of monetary policy.
ECB Minutes
Latest ECB minutes released on April 12
were dovish, as it echoed concern on
growing trade war tensions. The more
aggressive Trump is on China, the less
likely rates will rise. Appreciating Euro,
from 5 years of economic growth in the
euro zone, is also a sign of concern for the
economic outlook for the ECB.

EUR/USD Index – April 12

1.238
1.237
1.236
1.235
1.234
1.233
1.232
1.231
1.23

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

Technical Analysis
EUR/USD Exchange Rate
1.25

1.2

1.15

1.1

1.05

Relative Strength Index - EUR/USD

80

70

60

50

40

30

20

Introduction Historicals USD Outlook EUR Outlook Technicals Risks

Potential Risks
Dollar Deflation
All federal reserve policymakers are
confident that inflation will rise in coming
months, and are hiking up rates as a
response. Deflation results from capital
moving to non-productive, hard assets, that
preform best when money is losing value.
USD’s historical performance is pointed
downwards, which may create a downside
surprise in inflation, causing the federal
reserve to shift their tone from hawkish to
dovish.
Introduction Historicals USD Outlook
Domestic Turmoil
Political turmoil within the United States
government could weaken the economy and
the dollar as a result. Paul Ryan’s retirement
from the House is discouraging for the
Republicans and increases the chance that
Trump will be impeached. Twice the
number of Republicans are leaving the
House as Democrats, and a Democratic
Congress will put pressure to remove
Trump from office. Uncertainties also arise
regarding the Mueller investigation against
Trump on Russia’s interference in the 2016
election.
EUR Outlook Technicals Risks
Appendix
20 USD Relative Value Analysis

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EURUSD BGN Curncy GBPUSD Curncy USDJPY Curncy USDCAD Curncy USDSEK Curncy USDCHF Curncy