CNH: USD/CNH Drifts Away From Recent Highs Near 7.1200, Implied Vol Lower

Source: Bloomberg Finance L.P./MNI 

The global bank maintains a short USD outlook, see below for details. 

J.P. Morgan: "The weak dollar view passes a flow test. Outlook:The starting point of USD valuations and positioning has become healthier for the weak dollar view heading into September’s Fed easing. Tariff-fueled stagflation-lite cannot be written off just yet, and US real yields are likely to keep eroding. The weak dollar view passed a flow test in June by looking through large scale RoW US equity purchases. Anxiety around the return of US equity exceptionalism is also less pressing when the RoW is outpacing the US on growth revisions. A basket of DM FX that isolates the fiscal factor has diverged from the long-end bear steepening in G4 yield curves, and should recouple as fiscal concerns intensify in 2H. We stopped out of our NZD longs as the RBNZ bucked our expectation for a hold, but maintain that there is a tension between a lower real OCR path today and gearing to future activity revival for a cheap currency like NZD.

Macro Trade Recommendations: Hold USD shorts vs EUR, JPY, AUD, NZD, CAD in cash/options. Keep GBP shorts vs EUR, CHF, NOK, SEK. Stay long Scandis vs EUR. Stop out of tactical NZD/SEK long. Unwind far strike of USD/CAD put spread.

Emerging Markets FX: Hold OW EM FX stance after a month’s pause, with latest data supporting EM FX and fading US exceptionalism.

FX Derivatives: Buy USD/HUF-EURHUF vol spread and USD/MXN weighted calendars to position defensively, and NZD/USD-CHF/USD corr swap to capitalize on firm USD corrs. Collect premium on EUR/BRL topside.

Technicals: DXY Index remains range bound below the 2023/24 range lows. EUR/USD rebound stalled at1.1743-1.1881 medium-term resistance. Cable rebound fades below a cluster of trend line resistance. USD/JPY is coiled between the 50-day and 200-day moving averages. AUD/USD slides toward critical pattern support." 

The global bank expects USD weakness to continue, with a number of different scenarios possible. See below for more details. 

Goldman Sachs: "USD: Downhill paths from Jackson Hole. We see the move up in the Dollar over the past week as a short incline in an otherwise downward descent. As most hikers know well, going downhill can often prove more treacherous, and we see multiple paths to a weaker Dollar, some more benign than others. One of those benign paths is our baseline scenario, where we expect successive Fed cuts to keep elevated recession risk at bay but nevertheless erode the attractiveness of the US front-end in a stall speed economy. At the same time, above-consensus European growth forecasts mean that the global outlook looks more balanced and the US less exceptional compared to the past. While the macro data in China is more divergent, local equity markets have been buoyant, and the CNY fix continues to move steadily stronger. But an erosion in the Dollar’s high valuation is also likely in less benign circumstances. As Chair Powell articulated in his Jackson Hole address, “ ... downside risks to employment are rising. And if those risks materialize, they can do so quickly...”. Given his support now for adjusting rates, we anticipate that the market debate will now shift to 25bp vs 50bp in September and the path beyond, and incoming data will shape that. If the downward revisions to job growth in the last payrolls report—typical around cycle turning points—portend a more significant slowing in the labour market, policy may need to adjust more rapidly as well, putting even more pressure on the Dollar. But it is also possible that firmer tariff-induced inflation is seen as a policy constraint that pressures equity risk, causing Dollar weakness to be more narrowly concentrated against ‘safer’ currencies like JPY, EUR, and CHF. Overall, while counter-trend rallies are certainly possible, like we saw earlier in the week and in July, we continue to expect further Dollar weakness, with room for rate sensitive currencies in Asia to join the month-to-date strengthening in the Euro and high-carry EM."