G10 FX: How I learned to stop worrying & sell the USD - TDS
|Analysts at TDS expect DMFX markets to operate within a context of three major themes in 2018: global macroeconomic and policy convergence, the return of valuation as a major driver, and—ultimately—how investors may face a fundamental shift in the currency market’s landscape now that central bank accommodation is starting to work in reverse.
Key Quotes
“With the US likely to take a hostile view of further USD strength, we note that central banks elsewhere appear to be more tolerant of FX appreciation. This applies as long as it remains driven by endogenous factors—steady improvements in growth, inflation, and output gaps—all of which we expect to see in the year ahead.”
“Convergence (Re) Emergence: Against this backdrop, we think the unwind of the broad USD bull market has further to run. While we see some risks to this view, our base case of convergence of growth and policy will support a global reallocation in portfolio flows into non-USD denominated assets. We go long an equal weighted basket of EUR, SEK, and NZD versus USD and CHF.”
“Overshoots & Ladders: FX markets have already started to correct toward fundamental fair values but this process is incomplete. With the USD still looking broadly expensive, we see room for this to extend and think some degree of overshooting is likely. We go long an equal weighted basket of JPY, GBP, NOK versus USD and AUD.”
“Beware the Policy Choke Chain: As central banks reverse course after years of aggressive easing, sentiment may grow increasingly vulnerable to developments that challenge the prevailing growth or inflation narrative. The rotation in capital flows may not entirely be a smooth process if investors begin to question the wisdom of a synchronous shift in policy. This may awaken the sleeping giant in vol markets.”
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