Summary of FX & EM Macro Strategy Quarterly Outlook Industry Overview - The document focuses on the foreign exchange (FX) and emerging markets (EM) macro strategy, particularly analyzing the US dollar's performance and its implications for various currencies and economic conditions. Key Points and Arguments US Dollar Stability and Growth Rebound - A potential rebound in US economic activity is expected to support dollar stability and favor risk-sensitive currencies that typically outperform during such conditions [1][3][11] - The dollar's resilience since June is viewed as temporary by market consensus, but several factors suggest a more solid backdrop for the dollar than generally appreciated [10][46] - The US economy is projected to grow at 2.0% quarter-over-quarter seasonally adjusted annual rate (SAAR) in every quarter of 2026, following a recovery from previous tariff impacts and easing financial conditions [21][24] Risks to Dollar Stability - The key risk to dollar stability is the Supreme Court ruling on Governor Cook, which could lead to a significant sell-off of the dollar if it signals a shift in the Federal Reserve's (Fed) independence [12][31][35] - Concerns about the Fed's independence are heightened due to potential changes in personnel and policy preferences that could lead to easier monetary settings, thereby weakening the dollar [31][36][38] Gold as a Hedge - Gold is recommended as a valuable hedge against inflationary risks, even after recent price rallies, due to its characteristics that align with those of safe-haven assets [13][57] Emerging Markets and Currency Performance - High-beta and high-carry segments of the emerging market FX universe are expected to benefit from improved growth prospects, stable dollar conditions, and low volatility [15][19] - The document anticipates that commodity currencies (e.g., AUD, CAD, NOK) will likely outperform the dollar in a risk-on environment, while defensive currencies (e.g., JPY, CHF, EUR) may underperform [27][30] CNY and Asian FX Influence - The stability of the Chinese yuan (CNY) is crucial for global FX dynamics, as it anchors the region's currencies and dampens volatility across FX markets [14][80] - The lack of potential for significant appreciation of the CNY implies limited downside for the USD, as Asian central banks are expected to continue absorbing USD to support trade performance [81][90] Market Sentiment and Predictions - The market currently anticipates rapid Fed cuts and a terminal rate below 3% by the end of 2026, which could lead to a weaker dollar if economic conditions deteriorate significantly [24][25] - The document suggests that if the adverse ruling on Cook occurs, there would be further downside risks to dollar forecasts, but absent this risk, a stronger dollar outlook would be maintained [16][36] Conclusion - The analysis indicates that while the dollar has shown resilience, various macroeconomic factors, potential legal rulings, and shifts in Fed policy could significantly impact its future performance. The interplay between US economic recovery, Fed independence, and global currency dynamics will be critical in shaping the FX landscape moving forward [57][96]