Global FX Views You Can Use: 50 Ways to Leave Your Dollar

A drop in cross-asset volatility has been a major factor to the early 2023 themes: weak USD, bullish risk and emerging market (EM) carry. That has been coupled with a more resilient global economy, where global data surprises have turned positive. Equally important, the outperformance of hard over soft data cushions the evolving soft-landing narrative. That means good data is not bad for risk. Continued U.S. disinflation should see further USD weakness as the stagflation story fades.

Cross asset macro vols:

• Rates volatility has been one of the main driving forces of cross-market price action. Last year was about the rise of rates vol, and associated macro stress, while it seems 2023 is shifting into the mirror image. Indeed, the major trend so far has been the easing of cross-market vol, boosting interest in risk assets.
• While cross-market vol looks a bit cheap to trend at these levels, we don't expect a rerun of the 2022 trends. In turn, rates and macro vol should be a bit choppier in the short-term. Yet the trend looks to downshift from last year, reinforcing carry/weaker USD.

Hard data prefers softer landing:

• The market remains focused on the narrative around a U.S. recession. While the yield curve and soft data argue for a recession, that doesn’t jibe with the hard macro data. As a result, we note the significant gap between hard and soft data, leaning in favor of the former – now by more than 1-sigma.
• Recession odds have fallen a bit, and the key narrative is that a soft landing is looking increasingly possible. The best-case scenario for the weak USD narrative would be a mix of easing inflation and firming global demand, where the growth expectations for the rest of the world are stronger than for the U.S. That story should work itself into the price in the months ahead.

Less Stagflation shifts focus to relative equity performance

• As part of the 2023 pivot, a few legacy factors like relative terms of trade should remain a bulwark for FX. Disinflation will matter more than inflation, suggesting to lean against the currencies with the greatest inflation deceleration. G10 housing risks will drive a wedge between terminal rates.
• Equities and valuations will take center stage. Our stagflation proxy underscores the relative discount that rest-of-world equities hold over the US. That also dovetails with the longer-term valuations priced into the USD, suggesting the start of a larger downturn that we expect to accelerate through H1 2023.

We think that any USD rallies should be short-lived. We see opportunity in EURUSD dips on breaks towards 1.06, and continue to look for EUR upside against GBP, CHF, SEK, and NOK. Continued U.S. disinflation should benefit EM carry, particularly MXN, BRL, HUF, INR, and ZAR. We prefer CHF funding and see upside risks in AUDCNH on China reopening, divergence and valuation.

Our Macro Ranking Scorecard Index (MRSI) FX model continues to show that FX performance remains focused on relative terms of trade, valuations, momentum and equity factors. Also, the rates momentum factor has surged in the past month, highlighting the divergence across terminal rates and associated housing market risks in the G10. That's a key factor to watch for NZD, NOK, SEK, and GBP. MRSI continues to be negative on the USD, but also NZD, GBP, and NOK. Our FX forecasts were unchanged this month.