Both the FX decoupling trade and the global currency war have come to an abrupt end of late, and many clients think this is the result of a coordinated effort by G20 officials to prop up global markets.
USD has emerged as the biggest loser of these developments. Indeed, investors fear that the Fed will lean against any future FX appreciation to avoid excessive tightening of global financial conditions.
The scope for central-bank policy coordination should be limited by the divergent outlook for the US and the rest of the world, however, and accelerating US inflation should force the Fed to hike again before long.
Sizeable output gaps in the Eurozone and Japan should keep inflation and inflation expectations subdued and add to the pressure on the ECB and BoJ to ease further, undercutting the demand for EUR and JPY.
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We also worry that the AUD and CAD rallies will falter without a sustained improvement in global growth and doubt that the latest central-bank efforts (coordinated or not) can be a game-changer.