USD: Will The USD Ever 'Smile' Again'? What's The Trade? – Credit Agricole

Credit Agricole CIB FX Strategy Research notes that there are 3 key FX drivers for the USD over the coming months:

1. The Fed should continue to normalize monetary policy further and we suspect that the market impact of its actions will be magnified by the approaching end of the ECB’s QE program in Q414. 

2. Washington DC looks every bit as dysfunctional as before Trump was elected as president and the Republicans won majorities in the House and the Senate last year. We now think that a fiscal stimulus package may come only after a considerable lag and, most probably, not in the next six months. 

3. Risk sentiment should continue to be resilient so long as global data continues to improve,” CACIB notes.

In all, we suspect that the price action in USD-crosses will follow the logic of the ‘USD smile’ in the next six months and beyond,” CACIB argues. 

In line with this view, CACIB sees USD recovery ahead mainly against JPY and CHF.

For the rest of G10 FX, CACIB argues that they could hold up better depending on the pace of policy normalization by their respective central banks.

Source: Credit Agricole CIB Research

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