USD: turning more neutral (Strategy Views from Credit Agricole)
We have been constructive on the USD since the start of the year,
arguing that FX investors were too bearish on the currency because:
(1) they were too dovish on the Fed especially relative to central banks
like the ECB; (2) they were too bearish on the US economic outlook
relative to the European and Asian outlook; and (3) they seemed to
ignore the exceptional role of the USD as a high-yielding safe haven that
can perform well under both risk on and risk off market conditions.
We should also mention that there were also some unexpected USDpositive
developments along the way, like the stronger-than-expected
US activity data as well as still-favourable US credit market conditions
and easing of US bank lending standards at the start of 2024, despite
growing private sector refinancing needs and concerns about the US
commercial real estate. We doubt that these favourable developments
would be sustained but recognise the risk that if the trends persist, they
could limit the need for aggressive Fed easing in a more lasting boost to
the USD in the coming months.
All of the above being said, the latest USD rebound has brought it more
in line with our currency forecast for Q1 and thus may warrant a more
neutral outlook from here. Furthermore, the recent repricing of Fed rate
cuts seems to align more closely with our view that the easing cycle
should start around the summer. In addition, while recent US data has
fuelled speculations that the economy may be re-accelerating, negative
base effects could still push US CPI inflation closer to the Fed’s target in
the coming months and thus rekindle rate cut expectations.
Looking ahead, key for the FX markets next week would be the US CPI
and retail sales data for January as well as Fedspeak. The inflation print
should attract most of the attention, and we believe that any downside
surprises could encourage some front-loading of Fed rate cuts to the
detriment of the USD and a boost to risk sentiment.
arguing that FX investors were too bearish on the currency because:
(1) they were too dovish on the Fed especially relative to central banks
like the ECB; (2) they were too bearish on the US economic outlook
relative to the European and Asian outlook; and (3) they seemed to
ignore the exceptional role of the USD as a high-yielding safe haven that
can perform well under both risk on and risk off market conditions.
We should also mention that there were also some unexpected USDpositive
developments along the way, like the stronger-than-expected
US activity data as well as still-favourable US credit market conditions
and easing of US bank lending standards at the start of 2024, despite
growing private sector refinancing needs and concerns about the US
commercial real estate. We doubt that these favourable developments
would be sustained but recognise the risk that if the trends persist, they
could limit the need for aggressive Fed easing in a more lasting boost to
the USD in the coming months.
All of the above being said, the latest USD rebound has brought it more
in line with our currency forecast for Q1 and thus may warrant a more
neutral outlook from here. Furthermore, the recent repricing of Fed rate
cuts seems to align more closely with our view that the easing cycle
should start around the summer. In addition, while recent US data has
fuelled speculations that the economy may be re-accelerating, negative
base effects could still push US CPI inflation closer to the Fed’s target in
the coming months and thus rekindle rate cut expectations.
Looking ahead, key for the FX markets next week would be the US CPI
and retail sales data for January as well as Fedspeak. The inflation print
should attract most of the attention, and we believe that any downside
surprises could encourage some front-loading of Fed rate cuts to the
detriment of the USD and a boost to risk sentiment.
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