Report16 February 2018Updated 5 months ago

FX Talking: Regime Change

The dollar looks to be on the cusp of a regime change. Washington’s policy mix is now seeing global investors demand a concession in the pricing for both US Treasuries and the dollar. These types of trends are difficult to reverse and USD/JPY may well hit our year-end target of 100 much earlier than expect

Executive summary

EUR/USD is also enjoying the weak dollar story. We doubt there is much the European Central Bank can do about its strength. However, we would warn that the market is probably too complacent about the risk of SPD party members bringing down both the grand coalition and Angela Merkel when they vote on March 4th. But any EUR/USD pull-back should be temporary.

Elsewhere in the developed market's space, sterling looks set to see huge volatility over the next four weeks. Reaching an agreement on a Brexit transition deal ahead of the March 22nd EU leaders’ meeting will be a challenge. Yet we favour progress and a supportive Bank of England environment to send GBP/USD to 1.45.

Emerging FX has so far been taking its cue more from the weaker dollar than higher US Treasury yields. We think the speed of the rise in yields is more important than the absolute yield level per se. And we think the global growth story will allow discriminating investors to see the emerging markets glass half-full.

In the emerging market space, we think the decline in USD/Asia has a lot further to run. Brazil's real could also prove the surprise package if social security reform were passed over coming weeks.