Stay long King Dollar

See the latest Australian dollar analysis here:

Australian dollar NUked

Credit Suisse with the note:

Our long-held bearish EURUSD view continues to play out, and largely for the original set of reasons we had put forward. The most notable of these was our expectation that rate differentials would continue to widen in the greenback’s favour. This view got a major boost last week after the large upside surprise in US Oct CPI data pushed up US rates across the board, with a weak 30-year Treasury auction also making sure higher rates were not limited to shorter maturities. As Figure2 shows, a 20bp jump in US 5-year yields over the past week has not been reciprocated by equivalent German yields. Our view has long been that in the US case, higher yields are well justified by the combination of growth / inflation dynamics on the one hand and the Fed’s lack of pushback against market rates pricing on the other. Yesterday’s upside surprise for US Oct retail sales further underlined this point. With US equities still near record highs, credit spreads tight and the VIX also subdued, there are few signs that higher rates are creating discomfor for US asset markets. If anything, real rates remain close to the lows of the year and have plenty of room to move higher without challenging recent upside range highs, leaving even more room for USD strength if that story unfolds.

The euro area story is different enough to present challenges for EUR. A simple look at European equities would suggest that there isn’t much to worry about, with SX5E pushing ever upwards to new 2021 highs. Despite this, it seems markets feel that if inflation is truly likely to be transitory anywhere, the euro area is near the top of the global list of contenders. Add to this the ECB’s unflinching dovishness and explicit preference for EUR weakness, and the single currency is left with little to recommend for it–even if the same reasons are pushing European equities higher. Indeed the weak EUR becomes itself an ingredient supporting European asset prices in this context. The market has already done much to unwind the jump higher in euro area short-term rates seen at the start of November, with ERZ2 well above its recent lows even as L Z2 and EDZ2 are near or through previous lows. But arguably still more can be undone on this front. And asFigure3shows, the market is busy marking up the risks of a sharper EUR decline against the USD much more actively than it is doing for other G10 counterparts, whether they be defensive currencies like JPY or pro-cyclical ones like AUD.

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