Jane Foley, Senior FX Strategist at Rabobank, suggests that the sell-off in EM assets translated directly into USD strength as the US growth story continued to pull in investors.
Key Quotes
“The attraction of the USD in this period meant that outflows from emerging markets that may have ordinarily have been directed into traditional safe haven assets such as the JPY and the CHF, were attracted instead into the USD. The sharp sell-off in US stocks in recent sessions has led to a shake-up of these trends and a repricing in the USD.”
“On a 5 day view the greenback is the second weakest performing G10 currency behind the CAD. For now we remain USD bulls, though this assumes that the US growth story has further to run.”
“Over the coming days and weeks it will become obvious whether the latest sharp moves in US stocks and the USD are a correction within a bull trend or whether they are instead a turning point in market sentiment.”
“We are of the view that by the second half of next year the market will be looking at a less attractive backdrop for the USD. By then slowing US growth, plateauing Fed interest rates and potentially a greater focus on the budget deficit could be clouding the outlook for the USD. That said, the likelihood of further strong US data prints over the coming months and a hawkish Federal Reserve suggests that the USD may not yet have peaked.”
“We see scope for a move towards EUR/USD1.12 by the middle of next year. We then expect EUR/USD to edge higher, though this assumes a supportive environment for the EUR.”
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