Bearish on USD, Bullish on EUR

Recent market consolidation does not change Citi’s medium-term bearish view on the USD. The US now run the largest twin deficits in recent history, outside of the global financial crisis period. This makes it likely that the fiscal boost could end with a relatively higher inflation and/or trade deficits – neither being medium-term positive for the USD.

In contrast, Citi analysts are medium-term bullish on the EUR as further appreciation is likely due to anticipated progressively less accommodative European Central Bank policy, despite risks such as political uncertainty from Italy or elsewhere.

Citi maintains that the Irish border issue in Brexit negotiations remains a major risk to GBP – with only a year to go until Britain enters into the transition period to leave the EU.

Citi believes that the AUD may likely be on a medium-term uptrend – supported by a stable broad risk appetite, the recent bounce in industrial metals as well as the resilience of Asian FX.

Global macro drivers for emerging market (EM) currencies suggest that EM FX could be broadly flat in three months’ time, but Citi analysts foresee that EM FX may be stronger in the next six to 12 months. This is largely based on a stronger EUR forecast and higher equities. Citi analysts see the most upside in MYR, but also think that THB and IDR can do well. As for the CNY: while Citi analysts think China is unlikely to use exchange rate as a tool in benign trade spats, they cannot exclude its use as an unconventional tool in a more extreme conflict.