Forex Institutional Research: Credit Agricole FX Daily
Key quotes from the Credit Agricole FX report:
USD looks very cheap relative to US rates – time to buy?
The deviation of USD from levels that are consistent with gauges of the relative Fed hawkishness like the spread between US 2Y rates and the G9 average has widened to record levels recently. The USD is cheap and we believe that some of the factors that have driven the currency’s undervaluation may be starting to abate. In particular, global economic and financial conditions could remain supportive while upcoming US data could confirm that the end of the ‘soft patch’ is drawing near.
Another reason for the USD to lag behind US rates seems to be the recent drop in US real rates and bond yields as inflation continues to accelerate, and the Fed still seems willing to let the economy run hotter for longer. Next week’s CPI data and the April Fed minutes will therefore attract considerable attention. Evidence that the persistent inflation pressure did not go unnoticed at the FOMC could help push up US nominal (and real) yields, burnishing the USD appeal once again.
One potential risk to our constructive USD-view could be the G7 meeting of finance ministers and central bankers in Tokyo on 20 and 21 May. The US Treasury has stepped up its criticism of competitive devaluation recently and we expect more of the same from the Treasury Secretary next week. USD may thus struggle to outperform the currencies of the US main trading partners – EUR and JPY. We are more comfortable calling for sustained USD appreciation against AUD.
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