FxWirePro: what drives bullish Dollar again in h2’2017 – low beta formats
Source: FxWire Pro - Economic Indicators / 03 Jul 2017 05:36:52 Eastern Standard Time
The US dollar index closed Friday unchanged on the day. The H1’2017 turned out to be one dominated by USD weakness, and the outperformance of EM carry, an outcome expected by few at the beginning of the year. The broad slide in USD intensified over the past month and the trade-weighted index delivered has weakened by 2.4% over the past month, its largest monthly drawdown in fourteen months.
For now, at mid-year, the USD is materially cheap on rate-spread models, money market underpricing of the Fed is at an extreme, and US relative cyclical underperformance is reversing.
In the upcoming weeks we highlight four themes that will drive FX in 2H:
1) The relative pace of policy normalization
2) China rebalancing and commodity supply risks,
3) Political risk, and
4) EM fundamentals and carry.
We also review four old and new wildcards:
i) The risk of more persistent disinflation,
ii) Washington fiscal uncertainty in September,
iii) Fed balance sheet normalization, and
iv) Trade protectionism headline risks.
Portfolio themes are unchanged. Keep exposure to FX carry, albeit in low beta format (short NZD/BRL, long TRY/ZAR) where valuations and idiosyncratic factors are compelling. Cheap valuations, improving growth and low US rates keep us long USD but only vs. other DM (long DXY).
Long currencies with strong idiosyncratic drivers (long ILS on strong external balances, long CZK on policy normalization and valuations).© FxWire Pro 2018. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.