US dollar to the moon!

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Credit Suisse on DXY.
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FX markets have now entered what was supposed to be an aimless, low-volatility fortnight ahead of the 25-27AugJackson Hole meetings. Instead, implied volatility in key pairs jumped at the start of the week, in our view primarily as a function of China’s surprise rate cut on Monday. Later in this week’s FX Compass, our Asian FX Strategist Max Lin looks at this development in more depth. But his original target of USDCNH 6.95 was bolstered in any case, and from a wider USD perspective was a reminder to the market that pro-USD shocks can still happen. This undermined further what had become a prevailing view for some market participants that basically all pro-USD themes were already priced in, and that asymmetries lay in favour of anti-USD surprises as a result. Given that our underlying view set remains pro-USD at a wider, strategic level, the jolt to sentiment and implied volatility has been helpful, not least given that higher FX vol tends to coincide with higher USD.

Indeed, it’s further testament to the tricky nature of calling FX markets tactically during this late summer phase that we attack this week’s Macro Overview section from a position of discussing USD strength at all. In last week’s FX Compass, we put our bets on an upside surprise for US Jul CPI data, and instead saw the opposite materialize. Our risk case had assumed in that scenario, a low-vol two-week period that followed might lead to an extended phase of follow-up USD weakness that could, for example, see EURUSDtest our Q3 range high expectation of 1.0400. But not so long after the CPI data, Fedtalk that quashed the idea that one set of softer inflation figures necessarily will hold back the scale and number of further rate hikes allowed the greenback to find its footing. And now even the idea of a low vol fortnight is questionable too. Which takes us back 360degrees to our original structural pro-USD stance, but via a complicated series of tactical head fakes.

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About the author
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.