In the view of Deutsche Bank, we're on the cusp of a turning point in the forex market as central banks shift to neutral from hiking.
"This big shift is seeding the ground for fresh trends," Deutsche Bank FX analysts write. "We think it will be relative growth differentials and the differentiated impact of monetary tightening across the globe that will be important new FX drivers ahead."
The main theme is that the trades that work into year end will be retracements of what's worked so far this year, aside from ongoing CNY weakness.
Here are their 10 themes:
- Theme# 1: Lone ranger - neutral EUR/USD
- Theme# 2: Yuan more time - buy USD/CNH
- Theme# 3: Nirp off, Nipp on – buy JPY vs GBP & CHF
- Theme# 4: Norse to be reckoned with - sell GBP/SEK, sell EUR/NOK
- Theme# 5: Offlowe'd to the all blacks - sell AUD/NZD
- Theme# 6: CEE you next time, hasta la vista - buy USD & MXN vs. COP & BRL, sell CEE, tactically sell USD/TRY
- Theme# 7: Down the Nile - buy USD/UGX, sell USD/EGP
- Theme# 8: Playa del calmen - sell a 4-month USDMXN straddle and buy a 4-month GBPUSD straddle
- Theme# 9: D'or closed - sell gold
- Theme# 10: Gold's coast over - buy gold vol, sell AUD vol
For the euro, they note that the trading range this year so far is the narrowest on record. That sets the stage for a protracted breakout, though they're not yet sure in which direction.
The main reason EUR/USD has failed to break higher this year is the relative outperformance of US growth to Europe. We see this growth divergence as likely to have peaked with forward-looking indicators on bank credit conditions, among others, improving in Europe but still deteriorating in the US. We also see the pessimism around Europe's external competitiveness as exaggerated with the current account surplus returning to its highs. Still, it is the Fed that remains the most important catalyst for a move lower in the dollar and while the US inflation picture is looking increasingly benign it is the outperformance in growth that is helping the USD. We stay neutral.
In the bigger picture, DB is carefully watching the trajectory of US growth. They have long noted how a Fed easing cycle on the back of a soft-landing is the most-bearish dollar outcome possible but even with inflation worries fading, the market is hesitating because US growth is so resilient.