Analysts at ING are still expecting the market to adopt defensive positioning against the dollar even as short term US interest rates already deeply discount a Fed easing cycle and may not go that much lower in the short term.
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“We say this because our trade team’s baseline view is that the US trade war with China and the EU will escalate over the next three to six months. We suspect that means that US recession fears will build.”
“If the above is indeed the case, investors will want to position defensively against the dollar. In particular, historical analysis of the USD trade-weighted index performance around the last three recessions (1990, 2001 and 2008) suggests that – on average – the greenback peaked around 11 months before the start of the economic downturn. Then, the dollar index gradually decreased in value and bottomed around seven months into the recession.”
“Given the risks, we expect investors to increasingly look to express a bearish dollar view via USD/JPY. That means USD/JPY could be trading at 100 far earlier than the late 2020 window in our current forecasts.”
“We also expect the CHF to remain in demand – especially if the risk of Italian elections and auto tariffs emerge this autumn. This will keep the Swiss central bank busy intervening to hold EUR/CHF above 1.10/11, but could see dollar pessimism evolve into a preference for short USD/CHF positions should EUR/CHF surprise the market and break under 1.10.”
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