August saw our bullish dollar projection largely play out, as summer markets were left to trade a theme of US exceptionalism as eurozone data deteriorated and concerns over China’s growth outlook amplified. Looking ahead, the key consideration for markets will be the magnitude of the eurozone slowdown, the likelihood of more tangible stimulus from Chinese officials, and whether further signs of a soft landing in the US will ultimately boost global risk appetite or keep investors in a more selective mindset outside of the dollar. On eurozone growth, recent inflation and wage data out of the continent suggests that a further rate hike is more likely than not in September, even as growth conditions scan as weak. Similar to New Zealand and Sweden, it now looks like the ECB may have to induce a recession in order to weigh on core price pressures. Meanwhile, in China, officials continue to show a preference to tweak a multitude of peripheral measures in order to quell the growth slowdown and maintain their longer-term economic goals. As a result, we expect further monetary easing to take place over the coming months alongside a continued easing of macroprudential measures. Should activity data suggest that 5% growth this year remains unattainable heading into mid-Q4, we expect more tangible fiscal stimulus measures to be announced, as missing the “achievable” growth target would warrant a regime change in China’s political economy. However, we note that this is a risk to our base case where the growth slowdown is instead managed through credit and regulatory channels. As a result, we don’t expect sentiment around global growth ex-US to improve in the near-term. In this environment, we expect data suggestive of a soft landing in the US to weigh on Treasury yields but not necessarily the dollar, at least not durably. Reflecting this, we have pushed back our call for a structural dollar decline and don’t expect the DXY index to fall below the 100 handle within the next 6 months. Instead, we continue to favour the greenback against yield (JPY) and growth sensitive (EUR and CNY) currencies, while we continue to believe currencies with strong fundamentals will outperform.
You can read our September 2023 FX Forecasts report here:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst