Bottom line: We expect the DXY to break higher, led by JPY and commodity FX weakness. Tactically we turn neutral on EM FX, but regard this setback as a pause within a medium-term uptrend. DM risk appetite should remain strong, benefiting currencies where central banks are considering tightening policy. At first glance the EUR falls into this category, but the BTP spread requires close attention. A less convincing than expected Presidential election victory for candidate Macron this weekend has the potential to send the EUR lower with widening sovereign credit spreads working as the catalyst. AUD and JPY remain ours hort position of choice, using the USD and GBP as asset currencies.
We still see DXY strength. It has been only the strength relative to the EUR and GBP preventing the DXY strengthening from here. All other G10 currencies have come under selling pressure against the USD with the CAD and the JPY leading to the downside. The JPY side we have researched over recent weeks suggesting it will fall with not only rising rate and yield differentials, but also increasing global inflation expectations working as the catalyst. Inflation breakeven rates (10y) started rising in Japan a few weeks ago. US and Eurozone breakeven rates have started to catch up but appear to be lagging. The differential should help USDJPY to rise.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
