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Does Higher Volatility Imply a Weaker USD?

  • USD: Political risk continues to rise approaching the US election. Cross market volatility could rise, making investors increasingly nervous about USD, given heavy speculative short positioning. On monetary policy, the Federal Reserve has shifted towards soft inflation averaging and is expected to remain accommodative for years to come and with uncertainty high, more quantitative easing (QE) could be forthcoming. This is likely to reduce the impact of risk aversion that has led to material USD strength.


  • EUR: Medium-term drivers such as relative real rate differentials are likely to lead to EUR outperformance. Hard data has mostly underwhelmed forecasts, but still shows a continued economic recovery in the Eurozone. Importantly, consumer-related data continues to improve and with more stimulus likely, a full recovery by mid-2021 remains possible.


  • GBP: Brexit is re-emerging as a key driver for GBP with the controversial “UK Internal Market Bill” raising concerns about “no deal” Brexit” once again. GBP may suffer as UK sees persistent drags on growth, but more monetary easing may be likely. Citi analysts expect a rate cut to 0% at the November MPC and another £50bn in quantitative easing.


  • JPY: JPY has underperformed the G10 complex over the last 6 months. Near-term political uncertainty is high and could cause a volatility spike typically associated with a safe haven bid, but reflation momentum in the rest of the world may cap JPY gains. 


  • AUD: AUD has rallied remarkably since March-lows, spurred by a generally reflationary backdrop and associated higher commodity prices, which is expected to continue to be an important driver of AUD. Domestic continued lockdown restrictions are worrying, but the mobility index has begun to pick up again and new COVID-19 cases remain low.


  • Asia: Asian EM FX is likely to remain flat in the next 3 months then broadly strengthen with IDR, KRW and INR outperforming over next 12 months. CNY is also seen strengthening over the medium-term.

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