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The US dollar is trading little defensively to start the day but the DXY is trading off the overnight low and the broader upswing in the big dollar that got underway at the start of Sep remains intact.
The USD saw little benefit from yesterday’s FOMC meeting, which saw policymakers upgrade their characterization of growth to “solid” (from “moderate”) and reaffirm the outlook for a Dec rate hike. Market pricing reflects a near 100% conviction for a Dec rate increase by the Fed (and increasing, if still relatively weak, betting on a March hike at around 33%).
On the day, European stocks look a little sloppy despite strong PMI data from the region while US Treasuries are flat and Eurozone government bonds are slightly weaker. The AUD and NZD are better supported, while the CHF and EUR are relatively firm.
Scale back EUR longs and increase USD longs: Rotate long EURCHF into long USDCHF via risk reversal; keep EURUSD call spread.
The much-awaited ECB meeting was modestly dovish and with it, Draghi was able to deliver euro weakening alongside a QE “taper” announcement for the second time in a year.
The halving of the monthly purchases to €30bn for nine months was only slightly more dovish than our base case of €20bn, but the signal of an even slower exit was more relevant and has resulted in our economists pushing back the call for the first rate hike by a quarter to in June 2019, in addition to a third taper in 4Q’18.
Even if this outcome hadn’t been as dovish, it would be fair to say that the ECB monetary policy will be on autopilot in the near future and thus diminish in importance as a driver for the euro in the coming weeks, leaving the currency open to vagaries of other factors such as US-dynamics, which are more dollar bullish at the moment (a substantially better-than-expected US GDP outcome this week reinforces strong growth momentum for the dollar), and Euro area political risks which will likely become more negative into Q1 given Italian elections.
The longer-term view is still euro bullish since the focus will eventually shift to ECB rate hikes (Sep’18 EURUSD target is at 1.25, ), but the near-term outlook is more fragile given the factors outlined above, in combination with crowded EUR longs and EURUSD overshooting rate differentials on most frameworks.
Such overshoots become more meaningful when viewed in conjunction with other macro considerations (such as ECB not being in play and growth upgrades cooling).
