Morgan Stanley sums it up. I agree.
The US dollar has strengthened beyond our targets but we don’t think that the move is over yet and so we move them stronger. Most of the strength is reflected on a DXY basis, with EM weakening but also outperforming non-USD DM currencies.
FX & EM Strategy: We updated our global FX forecasts in last week’s Global Macro Strategist: Wrong-Way Risk. We are republishing them here with further details, in particular on the changes for EM currencies. The conditions for USD strength remain intact,and even appear to be firming. As a result, we update our USD forecasts and now expect the Fed’s Broad USD Index to keep rising by about an additional 5.5% to 132 by end-2022, with the DXY hitting around 118. In nominal terms, these will be all-time highs for the Broad USD Index. We expect EM currencies to depreciate versus USD but remain stable on a TWI basis. LatAm: Our analysis suggests that LatAm has recently become the EM region least impacted by a stronger USD, though dispersion within the region remains high. We continue to expect currencies with attractive carry that remain somewhat more insulated from growth issues in Europe and Asia (and implicitly from USD strength to some extent), such as MXN and BRL, to outperform peers with weaker fundamentals such as CLP. We prefer relative value plays and we add long BRL/ZAR (targeting 3.55) and short CLP/MXN (targeting 1.94). Asia: We expect most Asian currencies to weaken, weighed down by ongoing depreciation of CNY. We expect USD/CNY to be 7.3 by year-end. We like long USD/PHP, USD/THB and USD/TWD while we expect SGD to outperform in NEER terms and INR to outperform versus EUR.
The full text of this article is available to MacroBusiness subscribers
