Standard Chartered: USD Hitting A Wall

Standard Chartered are “struck by the USD’s inability to gain ground in recent weeks on developments that are usually USD-positive. We had expected USD weakness to become more pronounced as 2022 progressed, but the recent weakness - as U.S. real and nominal rates are rising and equities are struggling - is puzzling. With improved confidence on the economic and market impact of Omicron and USD sluggishness on positive news, pronounced USD weakness may come sooner than we expected. We still anticipate choppiness as sentiment ebbs and flows on COVID and Fed risks, but maybe three steps downward, two back.”

• “The USD’s lack of response to interest rate moves that should be USD-positive could signal that the positive news is priced in. Recent messaging from San Francisco Fed President Daly and St. Louis Fed President Bullard expressing a preference for a flatter fed funds path combined with faster balance-sheet reduction may suggest that the Fed still wants to balance policy normalisation, slowing inflation AND firm growth.”
• “Our USD view implies that commodity currencies will regain their lost ground and more. AUD is about 3.25% weaker than before the onslaught of U.S. inflation and Omicron worries in mid-November, and CAD is about 1.6% weaker. In terms of long-term valuations, AUD is among the cheapest G10 currencies, and looks undervalued relative to its terms of trade and yield differentials. By contrast, GBP is the strongest G10 currency against the USD since 8 November, and CHF is the second-strongest. CHF could lag if risk appetite returns. JPY should continue to underperform on prolonged BoJ policy accommodation, although risk-off sentiment poses appreciation risk.”