Sell-Side Updates On USD
US banks J.P. Morgan and Goldman Sachs see further USD downside as likely to be relatively limited.
J.P. Morgan: "The window for further USD consolidation is open but the runway is finite considering valuations and election risks. Markets remain sensitive to inflation divergences, on which US still screens hot relative to the rest of DM, and USD yields do not look high controlling for inflation surprises. Optimism around the Chinese property sector has picked up sharply, but scale and implementation are key and not necessarily a given; still, ‘buy-the-rumor’ via a short CNH basket vs. AUD and SGD.
Macro Trade Recommendations: We've been scaling down net USD delta in recent weeks, with the majority of exposure still optionalized. We continue to hold pro-cyclical positions including long-NOK (vs CAD, EUR). Increase that beta by adding long-AUD vs basket of JPY & CHF, and a 3m EUR/SEK put spread. Short GBP & CAD into CPI releases. Long NOK/SEK. Neutral NZD pre-RBNZ.
FX Derivatives: The sparse event risk calendar over next few weeks brings range trades and carry scooping digital calendars to the fore. Opportunities on vol RV front are scarce. Long HUF vol vs short Latam vol is one pocket worth considering. US election pricing is tracking 2020 cycle for G10 but looks stretched for Asia EM. Fair to 2020 cycle, EUR and particularly CEE election vols look too muted.
FX Technicals: EUR/USD short-term rally progresses; pair still stuck in choppy range for now. EUR/JPY extends lift from key support and approaches major overhead resistance. USD/JPY holds key 151.945-153.069 support; 160 area to keep a lid on the pair. AUD/USD attempts to break through 2024 range resistance."
Goldman Sachs: "A shift in the mix. We think there is only limited room for the market to press Dollar shorts on the back of the inflation news. After all, while the prints were mostly in line with expectations, they were not in line with the target. As a result, the news does not change the policy outlook much beyond reinforcing the recent rhetoric. The subsequent market response has been reminiscent of the post-March FOMC FX reaction, when the response to ‘dovish dots’ stalled not because of fresh data, but instead because FX is still a relative game, and the Dollar fundamentals have not shifted much. And, this time around, we think the rally in front end rates looks more consistent with cyclical concerns rather than dovish expectations. That matters for FX because there is a narrow path for the Dollar to depreciate on a broad basis when growth is softening. This is especially true in the current environment when faster Fed cuts would likely be met with easier policy abroad as well. We think this is more about markets responding to changes in the ‘2nd derivative’ of surprises rather than a more substantial growth wobble. That means that carry and relative cyclical betas can continue to perform well. But the mix of news should reinforce the Dollar’s narrow range against the majors for a while longer. Divergence will have to wait."