Recent weakness in USD unwarranted, keep longs via options: BNP Paribas

The recent weakness in the U.S. dollar is expected to be unwarranted, considering the gap that has opened up with relative interest rates. The U.S. dollar’s long positioning has moderated significantly and now stands at just +1 on our +/- 50 BNP Paribas Positioning scale, the lowest level since the US election, reported BNP Paribas in its research note.

Moreover, upbeat United States economic data and upside inflation expectations hinted that markets are under-pricing the Federal Reserve interest rate hikes for 2017 and 2018.

“We, therefore, think this is an opportune time to reload USD long exposure. We keep USD longs via options, against the JPY, EUR & CAD,” suggested BNP Paribas in its note.

The BNP Paribas Bank in its research note mentioned that the risk to the bullish U.S. dollar view likely surrounds the unpredictability of the new US President. It may take time for Trump and Congressional Republicans to agree on tax plans. Furthermore, consumers and businesses may be more optimistic, but are choosing to wait to see how policy plays out before committing actual money.

Lastly, the BNP Paribas Bank concluded that it believe these risks are balanced by the light USD positioning, strong economic fundamentals and near-term USD undervaluation.