BofA on the King Dollar. I agree.
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An interesting pattern in G10 FX has been the tendency for USD to reverse its trend of strengthening and begin to weaken against lower beta FX as the Fed initiates hiking cycles – a pattern driven to a large extent by the market’s tendency to “price in” the Fed’s policy path early on. Additionally, two other considerations appear to be at work: (1) the US cyclical advantage typically erodes as US growth outperformance narrows amid an expanding, broadening global economic recovery and declining risk premium; and (2) commodity prices typically remain supported, reinforcing terms-of-trade shifts to the disadvantage of USD. This time around, things could evolve differently given the US is energy self-sufficient and if the effects of war in Ukraine persist or escalate to the detriment of Europe. The evolution of risk sentiment will also figure in prominently. For now, we prefer being nimble, having a bias to trade EURUSD from the short side, looking for RV opportunities on the crosses and waiting for better levels to trade USD from the outright short side on the cyclical higher beta pairs.
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