Opinions

While the broad DXY strength theme remains unhindered, we look out for market’s risk reduction pre-Thanksgiving holiday as well as month end potential USD selling flows. The coming week might show an elevated core PCE in US as well as elevated European CPI as well as Tokyo CPI nos. On a more medium-term basis, as was the case during Trump 1.0, we expect more vocal concern over USD strength as part of overall trade policy even though the REER of USD is at multi decade highs. US FX policy lies within the Treasury Department under the “ownership” of the Treasury Secretary. The incoming Trump administration will have a different approach to FX policy than the Biden administration. In this backdrop, we see short term trends in following G10 FX. JPY: Increased expectations for a BOJ rate hike might likely limit USD/JPY topside, and we expect weak performance in JPY-crosses We thus expect USD/JPY to trade around the 155 level for the time being, while JPY crosses such as EUR/JPY and CHF/JPY will likely underperform. EUR: We expect Euro to touch parity against Dollar sooner than later. It's a sell on rise market till 1.06 level is not breached on a closing basis. GBP: BOE's cautious stance on rate cuts should support GBP, especially as major central banks proceed with their own rate reductions. Consequently, we expect EURGBP to test 0.81 by the end of December. CHF: Though EURCHF tested 0.93 levels last week, we expect it to take a bounce up from this level. AUD: Short term range for AUD is .6450 & .6650 with both levels strong support and resistance. NZD: A 50bp cut by the RBNZ next week is our view, and we have a bearish NZD view; however, we might not be chasing the rising AUDNZD given the already over bought levels. CAD: Non-commercial investors' net short CAD position size has a Z-score of -3.0 (past 3-year samples), which is the largest among the major currencies. We do not expect the market's large net short covering of CAD to occur anytime soon, given the poor macroeconomic conditions in Canada, but at the same time, there's no strong catalyst to bring USD/CAD strongly higher above 1.40 in the near-term.

The move down in EUR/USD has continued and the last week fall been driven by increased Russia-Ukraine tensions, weaker November German and Eurozone PMIs, and our view of option barriers being hit (the next major barrier is around 1.0250). As a result, EUR/USD has broken through the key support level of 1.0450, reaching its lowest point since 1 December 2022. The market has marked the EUR down sharply for the following reasons. Europe’s economy is weak; its large bilateral surplus with the US makes it a target of Trump’s trade agenda; it does not have many fiscal options; productivity growth is sluggish and European Central Bank (ECB) policy rate cuts are the easiest path to stimulus. With the below estimates Nov PMIs, ECB might go for a 50-bps cut in Dec meeting itself. In our 19th Oct opinion piece titled “ECB might cut by 50 bps in Dec meeting” we had seen this possibility arising. Last week's Euro’s sharp drop to a two-year low versus the dollar cleared up options orderbooks, in one of the biggest positioning washouts in recent history. It’s now hard to tell how the market will react as interbank traders say orderbooks are thin, while around 80% of downside barriers exposure has been triggered and delta-hedging is pretty much done. The narrative remains bearish the Euro and interest for parity exposure may pick up. Thought there might be risks to our EUR bearish view via 1) position reduction ahead of the Thanksgiving Day holiday; 2) EUR/USD's historical outperformance in December (with a 78% success rate since 2010); and 3) potential easing of geopolitical tensions in Eastern Europe; we believe EUR is headed towards parity sooner than later, so Euro becomes a sell on rise FX till 1.06 is not breached on a weekly closing basis.

We believe that the R* for US is 3.25-3.5% and based upon this assumption, we see DXY as oversold at current levels. Markets are pricing in 230 bps of rate cut by end CY25 which to us looks stretched. Except the weak US NFP no of July (we believe it was more due to hurricane factor/auto plants closure), other economic indicators of health of US economy remains strong (retail sales/ ISM services). US economy’s growth exceptionalism over EU & China is likely to continue in near future because of continued fiscal support unlike EU & China. There might be some oversized overweight position in US assets but these are justified by growth & valuation multiples. Hence we believe DXY has made a short term bottom for now.

The recent weakness in DXY is an ideal opportunity to build DXY longs gradually as we enter the US election period. As it becomes clear that Trump and Republicans are going to sweep both Senate & Congress, this trend might gather pace. US growth is still higher than many of it’s G-10 peers & though slowing, might still provide the cushion for DXY to remain strong at least till Nov’24.

USDJPY took a decisive turn this week after weak US CPI numbers for June’24 as well as suspected intervention from BOJ. It was sitting at 161.85 waiting to tear north towards 165 but after the US CPI data on 11th July, first fell to 159 levels and further moved lower to close the week at 157.65 levels, app 4 biggies move in a matter of 36 hours.

French President Emmanuel Macron’s group was thrashed by Marine Le Pen’s far-right party in recent European Parliament elections. Le Pen’s National Rally won around a third of the total vote more than twice Macron’s party total.