DXY to be driven by relatively monetary policy – CitiBank

Analysts at Citibank see the US dollar rising by approximately 1% against G10 currencies over the period of one to three months and then falling around 2% for the rest of the year.

Key Quotes:

“As COVID-19 cases increase globally, G10 FX volatility has finally woken up with the CVIX seeing it’s biggest weekly move higher since December 2008.”

“In the short term, as risk assets continue to come under pressure, EUR and JPY will likely continue to be supported. Furthermore, spot moves in the DXY will be driven by relative monetary policy. With Fed Funds now being priced close to zero, while there is limited monetary policy space in Europe or Japan in order to offset the effects of FX appreciation, the high carry which the USD has enjoyed over its G10 FX counterparts for the past 3 years erodes, the USD can weaken.”

“We don’t see indiscriminate selling in the broad USD just yet. The inferences from the oil price collapse are that commodity FX/ high beta G10 may remain under pressure. The obvious candidates are oil exporters such CAD, but it’s likely the Antipodean currencies may struggle to materially rally in the face of lower commodity prices and risk sentiment in general.”

“Overall our forecasts imply that the $ will be ~1% higher vs. G10 over 0-3m, about 2% weaker over 6-12m and 7% weaker in the long term.”