Divyang Shah, Senior IFR Strategist
The explanation for this price action is simply that elevated concerns over Fed tapering QE has led to an adjustment/trimming of positions which for EM meant currency negative outflows/hedging while for DM currencies it was about a turnaround in USD-longs.
The latter seems unlikely to be sustained as a Fed that is tapering QE and a global economy whose growth outlook is weak should be a positive for the USD. While JPY shorts are on the back foot as expectations on what the BoJ can achieve had got ahead of reality it is still likely that the JPY will weaken the most when looking at DM currencies.
A mild recovery in the UK will help to limit downside on Cable and as long as the eurozone crisis does not make a comeback the EUR/USD will move lower in sync with Cable.
There should also be less demand for safe haven currencies such as NOK and SEK but the likes of AUD and NZD will not stabilise until there is a return of confidence on China’s growth outlook. The real kicker for the USD will not come until when the Fed shifts policy gears from removing accommodative policy toward actual tightening of policy.
