ECB: Accounts Highlight Optimal MonPol Will Depend on Trade Negotiations

• +6,500 FVM5 108-07.25, buy through 108-07 post time offer at 0714:53ET, DV01 $416,000. The 5Y contract trades 108-07.25 last (-4.25)

• *CIBC highlight that concerns over the Fed’s independence, Trump tariffs, and heightened uncertainty into earnings season has the market withdrawing capital from the US. They point out the DXY no longer sees haven demand which they believe can persist for some time. CIBC remain sellers of any near-term appreciation in the greenback with their favourite trades being long EUR/USD on dips towards the 1.14 level, and being short USD/JPY on rallies towards 142.
• *MUFG note the triple selling of the US dollar, US bonds and US equities highlights the further undermining of investor confidence in US assets. It fits with their view that the risk premium that has been priced into the USD since the announcement of reciprocal tariff plans is unlikely to diminish over the near-term. The topic of Fed independence under Trump’s presidency is not new but his comments last week were the clearest yet on how unhappy Trump is, leaving the greenback vulnerable to further S-T weakness.
• *SocGen say it’s hard to avoid the conclusion that imposing draconian import tariffs on goods which have no easy domestic substitutes in the US, will be inflationary (and ultimately, bad for growth). Added to political influence over the Fed and unsustainably vast international investment imbalances, and we have a recipe for a significant dollar fall, according to SG.
  • Positioning, speed of movement, the lack of attraction of most of the alternative currencies means it won’t happen in a straight line. However, SG highlight this is the biggest USD short against the euro and yen, and suggest the dollar should be sold on rallies.

Bank of America note that “both JPY and EUR have gained ~12% against USD year-to-date as the market seeks alternatives to the USD.”

• However, they think “underlying dynamics differ and JPY's rise looks more fragile than EUR's: 1) JPY's rise has accompanied a bigger rise in speculative positioning and increasing focus on a potential U.S.-Japan currency deal; 2) EUR's rise has been more persistent than JPY's across market regimes; 3) EUR's rise has been supported by an idiosyncratic story of German fiscal expansion; 4) JPY's rise has accompanied diminishing market focus on Bank of Japan rate hikes”.