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FX

How Far Can the USD Fall?

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USD: Citi analysts feel markets may be right in considering the potential possibility of the Trump Administration intervening – selling the USD vs. various European currencies. The USD is about 7-8% above its long-term average on a real effective exchange rate (REER) basis and downside is seen on the dollar in the medium-term. Should official dollar sales materialize, Citi analysts are likely to lower their USD forecasts.

EUR: The Fed likely has more room to cut rates in future than the ECB, assuming negative rates continue to present problems for policymakers. Meanwhile, data momentum and data surprises are dropping more in the US than in Euro Area, also a potential EUR positive. Another factor is possible intervention by the US Administration to sell USD. However, ahead of the September ECB meeting, Citi expects the Euro to drift lower.

GBP: Political uncertainty (general election) and likely monetary policy response from the BoE in the event of a “No Deal” Brexit are key downside risks to sterling. That said, a lot of bad news has already been priced in, with GBP 2% away from its Oct 2016 lows.

AUD: The RBA has cut the policy rate at their last two meetings, bringing it down 50bps to 1%. They are now expected to pause until November, as they assess the impact of easing on the economy. AUD upside is likely to be limited, given the RBA is expected to be a laggard to the Fed.

Asia: Asian currencies are expected to first weaken in 3 months, then strengthen in 6-12 months. This is largely driven by a stronger INR and IDR. RMB depreciation pressure has eased with the trade truce in the short-term, but should trade talks fail and the US starts to impose tariffs on all Chinese exports, USDCNY could depreciate beyond 7.

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