Who would have expected divergence of monetary policies to weaken the USD?
The Fed has now adopted a third mandate, of global market stability, suggesting that a USD rally is unlikely as long as markets remain fragile. Rising US inflation could force the hand of the Fed, but it may take a while.
At the same time, the market is testing the BoJ for the first time since Abenomics was introduced, while the ECB cannot talk the Euro down, as they cannot ease policies again in the short term, after having eased in March.
The result is a strong JPY despite a risk-on market move and a weaker EUR despite recent ECB easing.
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A strong USD needs an almost perfect scenario of strong data in the US and abroad and buoyant global markets, which would allow the Fed to hike without concerns.
A USD rally is unlikely as long as markets remain fragile. We remain bearish USD/JPY.