Derived Data That Drive Results
SEB remains optimistic about the strength of the USD in the third quarter. Here's a summary of their main arguments:
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Previous Forecast Remains Relevant: The prediction for a strong USD in Q3 that SEB made in May continues to be valid.
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Shift in ECB Hawks: Over the summer, some ECB hawks softened their stance, ending a phase where the ECB and Euro dominated the G10 FX landscape. This aligns with SEB's hypothesis that the opportunity for other central banks to appear more hawkish than the Fed is dwindling.
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USD Seasonal Strength: The third quarter is usually characterized by a strengthened USD, particularly during the months of August and September.
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Stagnation in Equity Momentum: After a surge in the spring, equities are anticipated to lose momentum. The large-scale positions taken by CTAs, who are nearing their maximum long positions, and Risk Parity strategies, which increased their equity allocations from historically low levels earlier in 2023, indicate this. A slowing risk environment is expected to benefit the USD.
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Robust US Activity Data: The US continues to report strong activity data. In the short term, it looks as though the US will outpace both Europe and China in terms of growth. SEB predicts that any potential weakness in US macro data won't appear until late Q4. By this time, the delayed effects of leading surveys might begin affecting payroll data, and most of the savings buffers could be depleted.
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USD's Dual Outperformance: The USD is positioned to surpass other currencies either due to superior US growth differentials compared to the rest of the world or because of a decline in risk sentiment.
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Concerns Beyond Q3: While the third quarter looks promising, the subsequent quarters bring risks. If inflation readings soften, there may be increased speculation about the Fed making an earlier pivot, possibly towards rate cuts, which would be negative for the USD.
In conclusion, SEB remains bullish on the USD for Q3, based on the above-mentioned reasons. However, they also highlight potential risks beyond this quarter.
