FX Talking: Keeping the (bullish) faith
Despite many opportunities, risk assets have so far avoided the kind of sharp re-alignment with Main Street that so many expect. No doubt expectations that policymakers have a trigger-finger for fresh stimulus is driving this. Whether risk assets survive fresh lockdowns remains to be seen, but we continue to see risk supported on dips, US$ sold on rallies
Executive summary
FX markets are trading more in line with equity than debt markets. Or perhaps one could argue that Fed money creation is lifting all financial assets. Either way, Fed policy – both printing money and promising to keep rates low indefinitely – looks dollar negative to us. And after a potentially quiet few weeks ahead of us, US elections should add another layer of bearishness to the dollar story in late summer.
Assuming the EU Recovery Fund gets over the line, we remain bullish EUR/USD for 1.20 by the end of the year. Also in Europe, we look for outperformance by both the undervalued NOK and SEK. GBP still looks as though it has too much Brexit baggage and EUR/GBP could trade over 0.92 in 3Q. In CEE, the CZK is our top pick, PLN looks fragile.
Elsewhere, Asian FX has proved somewhat of a laggard. It will be interesting to see whether USD/CNY stays in a 7.05-7.10 range despite signs of optimism in China. We still like BRL – even after the enormous easing cycle – and of the high beta, commodity currencies, we would say both MXN and ZAR are most at risk of handing back gains.
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