Global FX Strategy: FX Compass: The long way home

Research evidence excerpt

Global FX Strategy: FX Compass: The long way home

localised nature of the conflict, with no attacks on Tehran or new Israeli

involvement. But if skirmishes persist or broaden, energy pricing could move

higher, leaving upside risk asymmetry for the USD.

3. USD-dampening shifts in rate differentials are limited with ex-US hikes priced. Rate differentials still offset terms-of-

Recent price action echoes late Q1 / early Q2: higher oil prices support the USD, trade, but less than in Q1

while rate differentials move against it as markets price higher risks of hikes

outside the US (see Figure 1Ratediferentialsonceagainofsetpro-USDtermsoftradeshifts and Figure 4RatediferentialsstarttoweighontheUSD). But with hikes already priced across

most markets, the scope for anti-USD rate differential shifts is much smaller than in

March, when little to no tightening was priced. We also doubt some central banks

will deliver what markets expect; the BoC, set to hold today, is one example we

discuss below.

4. US earnings could revive appetite for post-rotation US assets. With US earnings US earnings season could rekindle

season starting in earnest yesterday, and after equity investors rotated away from appetite for US assets

US assets into international markets, strong US earnings could rekindle appetite

for US assets. All else equal, pushed-out Fed hikes should reinforce this by creating

a more appealing low-vol backdrop for equity risk sentiment.

Ultimately, the key drivers of our medium-term USD preference remain the attractive

investment outlook for US risk assets and the greenback’s carry appeal, underpinned by

Fed hiking risks. CPI has reduced the latter, but neither pillar is fundamentally

challenged. As such, we still think USD dips will attract buyers.