FxWirePro: Before celebrating New-Year, glimpse through G10, EMFX, and tailwinds in 2018

The conviction of broad USD robustness through 1Q seems to be slightly edgy as the greenback has responded in snail’s pace but nosedived to retort to noticeable tax reforms, disinflation uncertainty is weighing once more, and the Fed is not signaling acceleration in hikes for 2018 despite building in assumptions of fiscal stimulus.

This implies any 1Q dollar strength might be much narrower and a greater likelihood that the range-bound and idiosyncratically driven conditions for the past month will spill over into 1Q18. This week we explore three driving forces around which many 2018 approach would be emphasized:

1) Whether tax reform, the Fed, and/or repatriation could lift the dollar beyond intra-quarter bounces; 2) The comparative timing and feedthrough of policy normalization into FX; and

3) If markets were too optimistic on the US trade policy and EM backdrop.

Tailwinds in 2018:

• Swift Fed tightening, dollar funding deficiency

• US Mid-term elections: Republican defeat

• Correction in equity and credit valuations, house prices

• Euro and US inflation relapse

• Bank of Japan ends QE 

• Central bank policy mistake, intervention

• China de-leveraging, trade disputes, armed conflict

Glimpse through G10 FX:

• USD flat yield curve will test Fed dot plot, expensive LT valuation

• Fiscal stimulus, offshore earnings repatriation may slow USD depreciation

• EUR: ECB blocking path to fair value, bearish skew before Italian elections

• GBP: cheap historically but binary outlook – EU/Brexit/trade

• JPY cheap, but will the BoJ raise Yield Curve target? 

• CHF: destined for return to pre-floor territory

• Scandis: cheap but fat housing market tails

Glimpse through EMFX:

• CZK, PLN prioritized in CEEMEA

• Carry and fundamentals are buffers against volatility

• India takes over the growth baton from China in Asia 

• BRL and MXN demand curtailed by election suspense

• Nine years of portfolio inflows, value becoming more selective