HSBC

USD: Timing is nearly everything

Since late last year we have advocated that a weaker USD would be consistent with an improving global economic outlook. However, we have also said the USD had already declined meaningfully in 2020 and so this year’s weakness should be limited in scale and duration. The USD would slowly begin to recover versus most major currencies, including the RMB, later this year. There are two important reasons to explain this framework. First, the peaking of global growth, sequentially, would mark the end of the USD’s broad cyclical decline. Second, the Fed’s path towards policy normalisation should support the USD gradually, especially when tapering actually starts. These points have underpinned our view of a gradual USD recovery, but the timing is wrong. Instead of these two forces slowly supporting the USD later this year and into 2022, this is happening earlier.

As a result, we have pulled forward our timing for the USD to strengthen and expect this to continue through 2022. We first pushed back against the idea that the hawkish Fed meeting in June is the specific catalyst. Fed funds futures had already discounted what the FOMC’s median dots suggested. Plus, the decline in short-dated real Treasury yields since the June FOMC suggested the USD should be slightly weaker. However, an important part of our framework has been challenged, which relates to signs that global growth has peaked and is losing some momentum. If we expected the USD to temporarily weaken this year against a still recovering global economy, then the opposite should also hold true.

JP Morgan

Well US CPI more or less in line, first time for a few months not a shocking beat to the topside seemed to give the market some relief and confidence in the transitory concept of inflation, although I would say price action in fixed income is quite telling if you couple the data with the blockbuster 10 year Treasury auction and yields are more or less similar to yesterday’s open, is the pain trade finally higher, not lower yields? For me, inflation is still a lot higher in the States than the rest of the world, and on the basis of what we have heard from Fed board members in the last week we are surely closer to some policy movement than we perceived a week ago, which should matter somewhat for the dollar. That translates into hanging onto usd longs versus the euro and chf in my view, the fact that euro couldn’t rally to first resistance around 1.1770/80 an encouraging sign, and whilst we tested the year’s lows pretty strongly yesterday and held, whilst below resistance there I favour the market having another go. Otherwise it’s a mixed picture, equities, oil and EM currencies enjoyed not having the sticker shock of a massive beat, but Chinese data was again on the softer side, once again the market which seems to start to run with a theme is stopped pretty quickly in its tracks. I continue to run short eurgbp, although the impetus for the trade has disappeared for now but price action does nothing wrong, short eurnok as the oil bounce back this week has been impressive and the corrective price action in eurnok seems exhaustive, settling below 10.40 would provide some comfort. Elsewhere took off usd/rub shorts, just unsure how some EM currencies trade in an environment where US yields are rising however gentle the price action from here, and remain short eurhuf although have crossed some against the zloty given the potentially dangerous news out of Poland yesterday.