FX Talking: Dollar decline: The real deal?
FX price action over the last four weeks provides a glimpse of the future. Windows of optimism as lockdowns are eased have been temporarily snapped shut as second wave fears emerge. Our bias would be that aggressive central bank liquidity provision means that risk assets are a buy on dips and the dollar a sell on rallies
Executive summary
In fact, the dollar has handed back just about all of its rally since mid-March. Looking ahead we expect broad-based pressure on the dollar to continue as investors put their money back to work. The run-in to the November Presidential election should also be characterised by a weaker dollar. Uncertainty over the election and a potential change in policies on trade, taxation and regulation should keep the dollar on the back foot.
Supporting the occasional bouts of reflationary-positioning have been the actions of European policy makers – both governments and ECB. We think EUR/USD has a window for 1.20 into year-end. NOK and SEK should perform well in the G10 space and CZK in the EM space. Some commodity FX (AUD, NZD and RUB) may have come far enough.
Elsewhere, Latin currencies have been performing well. The energy rally has certainly helped and our team is bullish on crude into 2H20. We prefer BRL over MXN, however, given the latter’s poor macro profile this year.
Asian FX has lagged the recent rally in risk and our team are cautious here.
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