FxWirePro: Bullish/bearish scenarios of dollar amid persisting US exceptionalism – USD OTC indications and hedging perspectives

Bearish USD scenarios: 

1) Washington issues worsen including fallout from midterms (US trade wars, Mueller 

Investigation) 

2) Trade tension materially de-escalates

Bullish USD scenarios: 

1) Tax reform triggers a larger if lagged repatriation or foreign investment flows; 

2) Growth/inflation stumbles in key rest-of-world regions, leading delays in policy normalization; 

3) Further devolution in EM assets drives demand for USD assets 

4) Trade tension worsens

It has been a rollercoaster week for FX markets as the 
broad dollar initially strengthened to make fresh 18-month highs early in the week on several developments— President Trump threat of imposition of new US tariffs if a deal with China isn’t reached, Merkel’s announcement to step down as party leader which added yet another source of political uncertainty for the euro (in addition to Italy), USDCNH drifted higher and finally and softer global PMIs.

The past month's FX forecast revisions incorporate, among other factors, a worsening US-China trade
war outlook, but an improved outlook for USMCA
(NAFTA) that on net nudge USD Index
projections higher, now expected to further
appreciate 1.5% from current levels. 

USD OTC Outlook: Please be noted that the positively skewed IVs of EURUSD of 2m tenors signify the hedging interest of bearish risks and same has been the case with GBPUSD.

While the negative risk reversals of 1-3m tenors indicates bearish risks remain intact in the major trend with mounting bearish sentiments in case of USDJPY and GBPUSD crosses, whereas some mild positive shifts are observed in USDCHF amid major downside risk sentiments.

Most noticeably, dollar crosses show highest volumes in OTC FX options.

Overall, the dollar is net flat on the week, but only after a 1.2% round-trip, where an early week trend-extension of a stronger dollar was reversed on a broad rally in risk assets.

Currency Strength Index:FxWirePro's hourly USD is flashing at -66 (which is bearish), hourly EUR and GBP indices are flashing at 58 (bullish) and -83 (bearish) respectively, while articulating (at 08:06 GMT). 

For more details on the index, please refer below weblink:http://www.fxwirepro.com/currencyindex