Report28 March 2018Updated one year ago

FX Talking: Protectionist pay off

South Korea's trade concessions have only encouraged President Trump that his negotiating stance is paying dividends. This is why we expect Washington to continue pushing its protectionist agenda heavily before the November mid-term elections, which means the risk environment will stay fragile

Executive summary

We expect the dollar to stay on the back-foot during this period. US protectionism clearly embodies a desire for a weaker dollar, and an orderly decline diffuses some of the risks normally associated with a consumption-driven widening of US deficits. Serious retaliation by China and the EU to US tariffs may well be the next chapter on trade.

USD/JPY should stay fragile, and we retain a forecast of 100 for later this year. April’s release of the US Treasury’s semi-annual FX report should prove a reminder that FX intervention is not an option for the BoJ in 2018 – at least not this side of 100. Germany’s huge trade surplus with the US also means the pressure is building for a higher EUR/USD too.

GBP is recovering as Brexit negotiators find some common ground. We continue to see GBP holding its own against the EUR and rallying further versus USD. The CHF also continues to soften. We think Swiss pension funds will struggle to roll increasingly expensive FX hedges on US assets, giving support to both USD/CHF and EUR/CHF.

Elsewhere we remain generally positive on EM currencies. CZK and PLN remain our top picks in the EMEA space. TRY to continue to struggle – especially as new hawks in the White House turn their attention to Iran. CNY should continue to perform well in Asia.