Report11 May 2018Updated 10 months ago

FX Talking: Enough already

We think the three-week, 4% dollar rally might have gone far enough. True, the US growth story looks strong. But unless one thinks US economic/interest rate divergence with the Rest of the World is going to widen a lot further and a Trump risk premium won't be priced back into the dollar, there's little reason to think this bullish move will continue

Executive summary

EUR/USD has perhaps seen a short-term low just above 1.18. If, and only if, rate spreads drive the EUR/USD trend over the next six months, we see an outside chance of a temporary dip to the 1.15/17 area. However, our preference is for consolidation near 1.20 before EUR/USD makes a bid for new highs probably in 4Q18.

This month it is also worth highlighting the referendum risk in Switzerland on 10 June. A populist call for ‘sovereign money’ – effectively killing the banking system’s ability to create credit – is a very low probability, very high impact event. Were it to succeed, EUR/CHF could quickly move towards fair value readings in the 1.50 area.

High yield emerging FX has been under heavy pressure over recent weeks, exposed largely by higher US rates. We expect a Central Bank of Turkey policy response to support the lira before elections in June. And the rouble now looks better supported with oil prices so high.

Latam FX is certainly back on the map. An IMF line of credit can bring a little stability to the Argentine peso and Brazilian real could also find some more support if BACEN signals its next rate cut is its last. July Presidential elections in Mexico will limit the extent of the Mexican peso recovery.