Credit Agricole suggests that global economic stagnation, even a potential recession, might be the dominant narrative for the rest of 2023 given recent disappointing economic data and the uncertain US economic outlook due to monetary and credit tightening, as well as debt ceiling fears.
This backdrop, coupled with a sluggish recovery in China, and cyclical headwinds keeping commodity prices in check, has led many FX clients to prepare for stagnation or a downturn. Historically, such periods often lead to underperformance in pro-cyclical currencies (like those of commodity and manufacturing exporters) and better performance of safe-haven currencies like the USD.
The USD has already seen gains due to increasing hopes that a debt ceiling crisis will be averted ahead of the 1st June soft X-date. A resolution could result in the USD rising further, especially against G10 smaller currencies, in line with past debt ceiling episodes. This could occur due to a potential ramp-up in US Treasury issuance and the paring back of Fed rate cut expectations in the rates markets, boosting the rate appeal of the USD.