USD: Lots of volatility ahead – TDS

Mark McCormick, Global Head of FX Strategy at TD Securities still thinks that the USD ends the year (much) lower than where it started, but the path there offers lots of twists and turns.

Key Quotes

“The current setup is partly a reversal of the one that started the year where valuation strategies beat carry, demonstrating the stress in the system.”

“If the US levies tariffs against remaining Chinese goods it's likely full risk-off. That's an environment where EUR, JPY and CHF generate strong gains against the likes of EM and the dollar bloc.”

“The JPY should fare well against Asian crosses like SGD, TWD and KRW. US equities are likely to tank too and its noteworthy that gold currently implies a move higher in EURUSD. This is also the PAIN trade that might prompt a move towards a deal later in the year.”

“The flip side is that we could see policymakers kicking the can down the road, reducing the delta of trade escalation. That take us back to pre-May markets, where global equities rally and markets remove some of the insurance cuts in the markets. That's negative for the USD, especially against the high-yielders and commodity currencies, notably the Oz. The EUR could benefit too, reflecting the loss of US growth divergence, though JPY and CHF will be notable losers on this outcome.”