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Citi

Is the USD Finding a Bottom?

  • USD: Empirical evidence shows that higher US growth relative to the rest of the world in conjunction with higher US yields, may see USD appreciate. A significant recalibration of US fiscal policy and the Federal Reserve’s (Fed) resolve to remain uber-easy is likely to be tested as the US continues to recover this year. This may cause US real yields to move higher and strengthen the US dollar index while low European and Japanese rates infers divergence to US rates and commodity exporters and helps weaken EUR and JPY. 

 

  • EUR: Citi’s data on momentum differentials between Europe and US and in 5yr and 10yr real yield differentials (Europe less US) have tended to lead the broad directionality of EUR/USD particularly well since the global financial crisis and likely represents a strong signal for impending USD strength. Bearish EUR signals via relative growth and policy divergence could come with a more pronounced move in relative real rates (in favor of USD) as the European Central Bank moves to prevent/slow rising EUR real yields.

 

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  • GBP: UK data momentum have been stronger since the turn of the year and the public health situation is improving. If expectations for Q2-Q3 widespread COVID-19 inoculation and an ease in lockdown restriction holds, flows into UK’s value assets could support GBP.

 

  • JPY: A likely tapering by the Fed to taper in Q4 this year could drive US (nominal) and real yields. Citi analysts see relative rate differentials continuing to drive USD/JPY higher.

 

  • AUD: Reflationary dynamics, strong commodity prices and risk-sentiment momentum are supportive of AUD strength in 2021. The domestic recovery also remains stronger-than-expected. However, as the RBA’s stronger bond purchases has helped curb some of the recent rise in yields and AUD, underlying strength in AUD is likely to remain but with a lower trajectory than prior expectations.

 

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

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