A summer roadmap for the dollar

Analysts at TD Securities argued that the market sits yet again at another inflection point.

Key Quotes:

"It rests on the market's view about whether US exceptionalism or global reflation will triumph in H2. We still think the dollar's best days are behind us and the MAGA theme is unlikely to revive the bull market. The growth story has offered the USD some legs into the summer but a flattening of the US curve yield is a major headwind for a sustained rally."

"The ECB has taken out the topside in the euro into yearend but we look for a break of 1.20 later this year as the data confirms that QE is on the way out."

"For now, this backdrop lends itself to short volatility structure in EURUSD, as the market awaits the data. The US yield curve highlights that the Fed cycle is drawing to a close while most of the other major central banks are in the early stages of policy normalization."

"Though growth has slowed, Europe and Japan are still growing above potential. Divergence rests on front-end spreads but we believe relative yield curves set the stage for H2. The quality of US growth is key as late-stage stimulus comes at the expense of debt and deficits. The US still needs to fund a gaping twin deficit and a mix of higher rates or a weaker USD are needed."

"A rising premium on US assets increases the scope for a recovery in the other reserve currencies in H2. This group also hold current account surpluses and remain the net savers."

"For the USD, this setup is not universally bearish as the end of the easy money era shines a spotlight on current account deficit currencies like the dollar bloc. Trade wars and the return of macro volatility don't help. The consequence is that we like long exposure to the creditor (JPY, EUR, and CHF) versus the debtors (AUD, CAD, and NZD) and still look for a deeper correction in USDJPY in H2. Here, we see value in owning 3m USDJPY 105/108 put spreads financed by selling a 113 call."

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