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Medium-Term Outperformance Expected for USD

  • USD: Over the medium-term, US Treasury yields and USD could continue to be driven by the opening of the US economy, higher growth/inflation and further fiscal stimulus. US 10-year Treasury yields could test the 2-2.5% range and financial repression in European and Japanese rates also infers continued divergence to US Treasuries. More near-term, broader rates sell-off could take a pause given stretched positioning. This and high expectations for US data have the potential to dampen USD upside.


  • EUR: For the first time since 2019, EUR-USD 5yr and 10yr real yield differentials have moved below their 200 day moving average, as the European Central Bank becomes more dovish as global yields rise, leading EUR rates to decouple from US rates and indicating further EURUSD weakness. Despite recent improvements in European soft data, lackluster vaccine deployment and 3rd wave of COVID-19 cases, infers lockdowns and restrictions in the Euro Area could remain until end of Q2 and provide a challenging backdrop for data.




  • GBP: UK’s public health situation is rapidly improving and fiscal support is also larger than expected. While there may still be long-term effects of Brexit, and elevated unemployment could persist for a while, GBP remains undervalued and flows into UK’s value assets could keep GBP supported.


  • JPY: Relative real rates could continue to be the main driver of USD/JPY strength. On the US side, the Federal Reserve is expected to begin tapering in Q4 while the Bank of Japan could leave short-term policy rate and JGB 10yr yield target unchanged through 2024.


  • AUD: Reflationary dynamics and positive risk-sentiment momentum may continue to support AUD in 2021. Relatedly, Citi analysts are positive on commodities such as copper, which infers still significant upside for commodity-centric FX like AUD.


  • Asia: Asian FX may be flat in 3 months then strengthen with CNY and INR likely to outperform while CNY, KRW, MYR and SGD gain over the next 12 months.


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