DXY tried and failed to break out. The pain trade is definitely higher now:
AUD is grinding through its H&S neckline:
Oil whacked, gold held on:
Metals, miners, EM soft:
Junk teetering:
Yields eased:
Stocks fell with a decent BTFD:
BofA sums it up for me:
The View: Real economy too strong for inflation target, macro policies not tight enough yet. Stay bullish USD h1 on risk-off, bearish later assuming inflation eventually drops; risk that it will take longer and more pain. FX depends on CB commitment to target. Real rate dynamics more positive for EM as year progresses, especially for BRL, ZAR and IDR.
Leading indicators: Despite strong labor data, leading indicators suggest US recession may be imminent. Historical analogs show growth shock and Fed cuts, upside risks to our bearish end-year USD outlook.
JPY: Rebound limited by structural headwinds: fiscal constraints on monetary policy, shift in Japan’s foreign assets. JPY front-end to remain low, supporting USDJPY carry. Rapid tightening risks JGB downgrade. We expect USDJPY to rise to 138 this year.
GBP: About pricing out bad news, not pricing in good news in 2023. Reluctance to go long acts as ceiling. Barring renewed domestic chaos, lows in GBP in place. 2024 may hold promise of better depending on Brexit. Structural headwinds well known and are playing a part in depressing domestic consumption.
FX vol: AUDJPY vol historically FX hedge for hard landing, followed by other AUDcrosses and CADJPY.
Asia FX: Maintain forecasts despite near-term pull-back on stronger USD. Neutral CNY as equity inflows balance negative carry and CA deterioration. Bullish KRW, TWD, THB on linkages to China, IDR on bond flows and INR on valuation. Bearish PHP on twin deficits.
If the DXY pain trade gathers pace, AUD down, down.
