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FX

USD Dynamics Continue to Weaken

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  • USD: Pre COVID-19, USD support was already eroding as the Federal Reserve cut rates and expanded its balance sheet as US growth began to slow. As the dust starts to settle from the March COVID-19 panic, the rising tide of easy money globally may see a mini reflationary macro environment that potentially favors risk currencies versus USD. With USD liquidity now abundant, this could also expand to more broad-based USD weakness.

 

  • EUR: A markedly reduced risk of a Euro-area (EA) “break-up” is being reflected in European assets with the key inflection point being good news on the EU recovery fund. Synchronized monetary and fiscal support is yielding “positive“ results on the euro zone recovery with increasing cohesion felt across Europe. However, further upside surprises to the EA recovery (consumer) is likely to be crucial to the pace and magnitude of EUR gains.

 

  • JPY: Near-term, extended long positioning may become vulnerable as reflation trades gain momentum. JPY is also facing additional headwinds from the prospect for sustained dovish policy from the Bank of Japan – Citi analysts expect the first rate hike only in July 2023.

 

  • GBP: Economic data momentum indicators suggest the UK is lagging behind other G10 countries in the race to recover from COVID-19 and it also faces some additional hurdles such as Brexit uncertainty. Further fiscal easing could also weigh on the GBP.

 

  • AUD: Reflationary momentum could continue short-term, with a remarkable rally seen in the AUD even against the backdrop of secondary lockdowns in Victoria. Risk asset directionality may continue to drive the AUD and with a nationwide lockdown now less likely, the faster-than-expected pace of reopening may see an upward revision in the RBA’s economic projections.

 

  • Asia: Asian EM currencies may appreciate modestly in the next 3 months and further do so in 12 months time, with CNY and TWD likely to outperform.

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