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Growth Forecasts Still Imply Weaker USD

  • USD: Growth and rate differentials are still likely to test USD strength. Easy money outside the US, especially in the Euro Area (EA), is preventing significant USD weakness in the near term. However, the USD may weaken in the medium term as US growth differentials narrow with the rest of the world (particularly versus EA) and with Citi analysts seeing lower US yields and downside risks on the Federal Funds rate.


  • EUR: The US Federal Reserve’s greater scope to ease relative to the European Central Bank (ECB), and a Lagarde-led ECB may be less ready to add monetary stimulus than a Draghi one, may limit the extent of EUR’s weakness.
  • JPY: Short-term volatility is likely to be more dependent on COVID-19 developments. Any further easing by the Bank of Japan is likely to be reactive to ECB/Fed easing and therefore following JPY strength, not prompting relative weakness.


  • GBP: Over the medium-term, consensus expectations for UK’s 2020 economic performance are low and given this, economic surprises may lead to the pricing out of 25bps worth of rate cuts already baked into short rates. This in conjunction with the pound’s cheap valuation, may lead to moderate upside in GBP over the next 6-12 months.


  • AUD: While negative effects of COVID-10 may weigh on AUD in the short-term and a worsening of the outlook is a risk, the negative market impact of COVID-19 is expected to dissipate and associated China easing may provide a bounce to risk assets like AUD.


  • Asia: USDCNY may rise near-term on the back of COVID-19 that may lead to China’s growth dropping to 4.8%YoY in 1Q. Asian currencies may trade slightly weaker in next 3 months reflecting CNH and COVID-19 effects but may appreciate 1-2% in 12 months.

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