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USD: A Familiar 'Smile' Pattern

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This year’s USD dynamic in our view resemble a familiar ‘smile’ pattern whereby the dollar strengthened on the initial dip in risk appetite early in the year, weakened as the Fed turned more dovish and should start strengthening again as the economy picks up and tightening expectations are rebuilt.

In her semi-annual testimony Chair Yellen pointed to a “sharp” increase in consumer spending, which should be confirmed by a solid May personal income and spending report next week. Meanwhile, the broader labour market indicators have been supportive of the Fed’s view that the very soft May payrolls report was somewhat of an aberration and our economists still expect two rate hikes to be delivered in H2.

However, with a Brexit having materialised and as global growth expectations may turn more muted on the back of it, it appears more unlikely that the Fed will consider higher rates anytime soon. This does not need to dampen the outlook for the USD, which anew benefits from rising safe haven appeal in an environment of EU driven risk aversion.

We remain long USD versus AUD and CAD via options. In an environment of unstable risk sentiment and a stronger USD, the commodity bloc is likely to suffer more considerably.

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