Reports
14 June 2021

FX Talking: Chasing carry in a low rate world

Abundant dollar and Euro liquidity looks here to stay for the summer and we maintain our mildly bearish dollar view. Those currencies backed by central banks taking a conventional approach to normalisation should continue to outperform

Executive summary

What has quickly become a consensus view over recent weeks is that abundant dollar and Euro liquidity is here to stay. Falling volatility levels mean that searching for yield is the only game in town. Key risks to that view largely come from the Fed mis-managing communication as it exits from loose policy or a resurgence in Covid cases – particularly in Asia. For the time being, however, we favour the benign scenario and a softer dollar.

The June 16th FOMC may be the last major event risk before the northern hemisphere firmly settles into summer trading. Constrained supply in the US labour market means that the Fed is probably not in a position to fire the starting pistol on the tapering debate. Consensus seems firmly positioned for three quarters of Fed tapering, starting December 2021, and the first Fed rate hike coming in early 2023.

There are always risks – especially when consensus is so one-way – yet we maintain our mildly bearish dollar view. Expect those currencies backed by large commodity exports or with central banks taking a conventional approach to normalisation (e.g. CAD & NOK) to outperform. Declining volatility levels could see EUR/USD glued to a 1.20-1.22 range yet US investors backing the European re-opening story may well deliver 1.25+ levels.

This should be a constructive environment for emerging markets. And front-loaded policy tightening in Russia, Brazil and shortly Czech Republic, Hungary and Chile should keep local currencies supported. Asia is the weak link currently. Renewed lockdowns and their impact on supply chains and global demand need to be monitored carefully. Yet on balance we expect the Renminbi to stay in demand – after all it is a high yielder.

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