India's Central Bank Holds Rates Amid Iran War Energy Shock 
Bank of Japan Signals Rate Flexibility Amid Yen Volatility 
ECB Warns of Rising Inflation Risks Amid Iran War Energy Shock 
Citigroup Delays Fed Rate Cut Forecast Amid Strong Jobs Data and Inflation Concerns 
RBNZ Holds Rates at 2.25% as Middle East Conflict Fuels Inflation Concerns 
South Korea Central Bank Signals Cautious Policy Amid Inflation and Middle East Tensions 
Paraguay Holds Interest Rate at 5.5% as Inflation Remains Stable Amid Global Uncertainty 
RBA's Hauser Flags Uncertainty on Rate Settings Amid Iran War Economic Risks 
Federal Reserve Probes Big Banks Over Private Credit Exposure Amid Growing Systemic Risk Concerns 
Singapore Tightens Monetary Policy Amid Middle East War Inflation Risks 
RBI Clamps Down on Rupee NDF Activity, Banks Face Steeper Losses 
Bank of Japan Faces Rate Uncertainty Amid Middle East Oil Shock 
New cycle highs: Between late January and May, the US dollar fell 7.5% as an EM sell-off triggered (downward) revisions to expectations of Fed rate hikes and dragged 10y TIIPS yields down from over 70bp to below -10bp. But after meandering sideways through the summer, real yields have moved back up and the dollar has followed. On a trade-weighted basis, it’s now higher than it was at the start of the year.
Ever since the Trump’s US presidential election victory in November, the DXY has risen over 10.3% so far, major backed by higher front-end core yields as markets have repriced a reflationary outlook from expansionary US fiscal policy.
Policy mix extends USD cycle: the stronger growth, excitement about the potential effects of tax cuts and expectations of faster monetary tightening will take the dollar higher in H1’17, but like Icarus, it’s in danger of flying too close to the sun. It can rise while Europe is beset by political uncertainty and while the consensus is that President Trump will deliver faster growth but only slightly higher inflation, but if political concerns ease in Europe, the euro will likely bounce.
If the dollar does some of the Fed’s work for it, if stronger demand boosts the US trade deficit and if real yields are eroded by a further pick-up in inflation expectations, then the dollar rally should grind to a halt. It is not so much a case of Mr. Trump having feet of clay, as the dollar having wings of wax.
Where and when to fade USD strength: Fed has raised its hiking bias from 2 to 3 more hikes in 2017 that could hinder upside potential of this underlying pair.
Moving on the dollar, although FED has provided the substantial cushion to USD with its hawkish tones of monetary policy. Due to the Donald Trump's presidential election, the dollar continued to get a booster in conjunction with FED, whereas Euro is still clouded with Brexit and French & German polls, as a result, EURUSD heading for parity.
We expect EURUSD to trough around parity, before the French elections, unless Front National candidate Marine le Pen wins the presidency (in which case the low would be lower and later). USDJPY has further to run as the BoJ anchors nominal yields, but above 120, momentum should slow. We expect yield-seeking investors to return to EM currencies from Q2 onwards.
