Credit Agricole shares insights on the recent interplay of economic factors, noting a revived 'soft landing' narrative and its potential implications for the forex market.
Key Points:
Soft Landing Revisited: The beginning of the week sees the 'soft landing' narrative reemerging, driven by data-centric forward guidance from both the Fed and the ECB, and the US's better-than-projected economic data. A soft landing scenario implies that economic downturns will be mild, and recoveries will be swift, minimizing economic shocks.
FX Impacts: The scenario is seen as favoring pro-cyclical and higher-yielding currencies due to eased global financial conditions and enhanced risk sentiment. Such a backdrop would typically suggest a bearish outlook for the USD, given a reduced demand for safe-haven assets.
USD's Strong Stance: Contrary to conventional expectations, Credit Agricole postulates that the USD might flourish under a soft landing framework. The bank stresses that robust US data combined with a peaking Fed cycle could accentuate the allure of USD assets. Furthermore, the USD's significant rate appeal could position it as a sought-after carry investment currency.
Market Positions and Relative Value: Current FX market trends show a short stance on the USD when compared to the EUR, GBP, and CHF. Both EUR/USD and GBP/USD seem to be trading at premiums compared to their short-term intrinsic worth.
Anticipation from Upcoming Data: The bank anticipates that the impending US economic data releases for the week could further enhance the attractiveness of the USD across the board.
Summary:
Credit Agricole underscores the potential for a robust USD performance in the backdrop of a renewed 'soft landing' narrative. While such a scenario traditionally detracts from safe-haven assets like the USD, the bank argues that the present conditions, characterized by resilient US data and a peaking Fed cycle, could instead buoy the USD, especially when factoring in its substantial rate appeal and market positioning against European counterparts.
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