Dollar positioning looks more balanced now, but we see this as a temporary dollar bounce before two further Fed cuts and seasonal weakness into year-end.
The eurozone story does not look brilliant. Yet we are reasonably confident that the European Central Bank has finished cutting interest rates. And while there are genuine concerns that German fiscal stimulus will be watered down, we still think the net effect will be positive for eurozone growth and the euro into next year. We remain bullish on EUR/USD for the low 1.20s.
The yen is a very different and more volatile story. Continued interest in the carry trade and switching funding from dollars to yen warns that USD/JPY could trade to 155. But equally, recent gains could completely reverse if new elections have to be called. Elsewhere in G10, sterling looks fragile into the event risk of the November budget, and commodity currencies remain mixed. Challenges here include weak data and a potential USMCA revision weighing on Canada, while Australia will track US-China relations closely.
Emerging market currencies in general have had a good year. Carry should remain a key driver for the high yielders in Turkey, Latin America and Hungary. We will watch the forint carefully, however, in case the central bank turns less hawkish. The Czech koruna remains our favourite currency in CEE. The rand is performing well too – the lower inflation target attracting portfolio flows. Asian FX continues to frustrate. The best chance of Asian currencies rallying is probably the resumption of the broad $ bear trend.
