20180702-大华银行-FX_Strategy__US_Dollar_Begins_Second_Half_Of_2018_On_A_High_Note_7页_465kb

FX Strategy Summary

Core Content

This document outlines the UOB Group's FX strategy for the second half of 2018, focusing on the US Dollar (USD), EUR, GBP, and AUD. It provides an analysis of the USD's recent rebound, EUR and GBP positioning, and the AUD's short-term challenges, while also referencing key economic and market developments in the region.

Key Drivers for USD Rally

• Rate Hikes: The US Federal Reserve (FED) is expected to raise interest rates twice in the second half of 2018, increasing the total number of hikes for the year to four.
• Inflation Outlook: US inflation indicators have continued to rise above the FED's 2% target, and Jerome Powell has expressed a more confident outlook on US growth.
• Trade Conflict: Concerns over the impact of the escalating trade conflict between the US and China on exports have led to broad selling of CNY and Asian currencies, boosting the USD.

USD Positioning and Technical Indicators

• The USD Index (DXY) has rebounded from under 90 to above 95 since April 2018, indicating a strong rally.
• DXY positioning has flipped into a net long, suggesting increased bullish sentiment.
• The DXY has become disconnected from the flattening US yield curve, with the 10-year vs 2-year Treasury yield spread narrowing.
• Technical indicators show overbought conditions, with a possible short-term top forming.
• A pull-back is expected, potentially taking DXY down to the support zone at 93.40/60.
• A break below 94.17 could signal the start of a deeper and sustained decline.

EUR Positioning

• EUR bulls have capitulated due to disappointing economic performance and ECB's cautious stance on rate hikes.
• EUR/USD has fallen from 1.24 to nearly 1.15, as net long positioning was unwound.
• The ECB's delay in rate hikes and political risks in Italy have weighed on the EUR.
• Despite this, a gradual recovery in EUR/USD is forecasted, with expectations of reaching 1.21 by year-end and 1.23 by mid-2019.

GBP Positioning

• GBP/USD has declined from near 1.44 to the low 1.30s due to uncertainty around Brexit and the BoE's indecisive rate decisions.
• Brexit negotiations remain unresolved, and the BoE has not provided confidence in the GBP.
• The UK economy is expected to grow at 1.5% this year and next, down from 1.8% in 2017.
• GBP/USD is likely to struggle at 1.32 for the remainder of 2018 and may drift lower to 1.30 by mid-2019.

AUD Positioning

• Confidence in the AUD has declined due to the impact of trade tensions and a weak inflation outlook in Australia.
• The RBA has remained neutral, while the US continues to hike rates, worsening the yield spread against the AUD.
• AUD/USD has fallen from above 0.80 to under 0.74, but the author maintains a positive outlook due to potential trade tensions de-escalation.
• A rebound to 0.78 by year-end and 0.80 by mid-2019 is anticipated.

Other Market Insights

• The document references recent reports on various economies and currencies, including Indonesia, Malaysia, Vietnam, and Singapore, highlighting their economic conditions and FX dynamics.
• These reports suggest a mixed outlook across the region, with some currencies showing signs of stabilization or recovery.

Conclusion

The USD is currently overbought and faces a potential short-term pull-back. EUR and AUD show mixed signals, with EUR likely to stabilize and AUD poised for a rebound. GBP remains under pressure due to ongoing Brexit uncertainty. The UOB Group maintains a cautious yet positive outlook for the EUR and AUD, while being wary of further declines in the GBP.

Disclaimer

• This document is for informational purposes only and should not be used as investment advice.
• The views expressed are those of the authors and do not reflect the trading positions of UOB Group.
• UOB Group makes no guarantees regarding the accuracy or completeness of the information provided.