USD: A short-lived rebound on the cards – ING

LONDON (August 6) Japanese stocks have rebounded some 7% after the recent collapse, and stock futures in Europe and the US are also pointing to a strong open later today. But yesterday’s price action told us something interesting about the equity-FX link, ING’s FX strategist Francesco Pesole notes.

The USD should head lower once stock markets stabilize

“The key takeaway at this stage is that the US Dollar (USD) has lost its safe-haven appeal. That is because soft US data was behind the market turmoil, and investors are not reluctant to price in aggressive Fed easing as a reaction, which is a USD negative and highly favours the other safe-havens JPY and CHF. The bet here was that Fed Chair Jerome Powell would react to an equity selloff.

“After all, Austan Goolsbee said that the Fed won’t overreact to one soft jobs print, the ISM service rebounded above 50 yesterday, and there are explicit concerns about the inflation trajectory at the Fed. All this may not be entirely consistent with the 111bp of easing priced into the USD curve by year-end. The question is perhaps whether Powell has a line in the sand for the stock market after which it would deliver an off-meeting rate cut.”

“Once stock markets ultimately stabilise – and barring an inflation surprise next week – the USD should head lower, in our view. The repricing lower in the Fed terminal rate now means that the USD’s rate advantage has been trimmed and there is room for pro-cyclical currencies to readjust higher versus USD on the back of more favourable rate differentials.”

FXStreet