Synopsis:
Credit Agricole pushes back against the growing narrative that FX hedging of USD assets will drive a significant USD sell-off. The bank outlines four reasons why hedging-related flows are not likely to be materially USD-negative.
Key Points:
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Historical Evidence:
FX hedging has historically dampened the FX impact of capital flows, rather than actively driving USD depreciation. -
Hedged ETF Inflows:
The recent surge in foreign buying of US stock ETFs has already been largely hedged, meaning the USD hasn’t benefitted much from equity inflows—but it also hasn’t suffered as a result. -
Lower Bond Hedging Ratios:
Foreign buyers of US Treasuries have reduced FX hedge ratios due to high hedging costs tied to a flat UST curve, and are unlikely to add hedges unless the curve steepens significantly. -
USD Sentiment vs. Bond Appetite:
A weak USD narrative combined with expensive hedge costs could deter US bond demand, pushing yields higher—but not necessarily weakening the USD further.
Conclusion:
Credit Agricole argues that while bearish USD sentiment persists, the impact of FX hedging flows is overstated. Hedging dynamics may limit the USD upside, but they are unlikely to generate the kind of sustained selling pressure needed for a major downturn.
