FX Talking: Trump gives and Trump takes (the USD strength)

The Federal Reserve policy path is set to remain intact for now (in the direction of a further gradual tightening) and the trade war overhang being firmly in place, the broad-based USD weakness of EM FX rally may not last for too long and can be easily derailed.

The price of sterling continues to reflect an enigma of uncertainties: a fragile UK government, uncertainty over the Brexit end-state and economic policy uncertainty. Risks are that EUR/GBP heads to 0.92 in the third-quarter if Brexit noise picks up.

In the Latam space, we remain wary of the Brazilian real, as the room for a surge in voter support for the establishment candidate (i.e., Geraldo Alckmin) is relatively limited. We expect demand for FX hedge to remain high and result in additional BRL weakness.

Asian FX will be particularly vulnerable to the impacts of this developing trade war. With CNY weakness fully in place, the next wave of the trade war may hit Asia’s commodity currencies hardest including the Malaysian Ringgit and the Indonesia rupiah.

In the CEE FX space, we remain negative on the Hungarian forint and look for EUR/HUF to re-test the 330 level this summer. Further tightening from the Czech national bank this year should be supportive of the Czech koruna, but this may not a story for the August central bank meeting.