USD: Current Levels An Opportunity To Establish Fresh Longs - Credit Agricole

The dovish outcome of the March Fed meeting dealt a blow to the FX divergence trade and it has sent the USD tumbling of late. We doubt that this is the end of the multi-year USD bull-run, however, and see the current levels as an opportunity to establish fresh USD-longs.

In particular, we expect that the combination of easing financial conditions and recovering commodity prices should allow the Fed to resume its tightening cycle as soon as June. The USD TWI has further sold off in excess of the correction in the spread between the USD 2Y rate and the average G9 2Y rate.

Recent history would further suggest that such deviations between FX and rates markets cannot be sustained over the longer term. We subsequently expect that the USD should start a correction higher yet again vs its G10 peers.

Next week’s US data and Fed speakers will attract considerable attention. We doubt that the Fed speakers will exceed Yellen’s recent dovishness. This together with potential positive surprises from durable goods data could help USD consolidate.

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