FX Presentation_ Near-term USD bullish but pondering medium-term risks. Mon Feb 10 2025

Summary of Key Points from the FX Outlook Presentation Industry Overview - The document pertains to the Foreign Exchange (FX) Strategy industry, specifically focusing on the outlook for various currencies against the US dollar. Core Insights and Arguments 1. Near-term USD Outlook: The USD is expected to remain bullish in the near term, with a significant probability (approximately 70%) of a 10% tariff rate being priced in, which should support the dollar [5][6][12] 2. Tariff Impact: Tariffs are anticipated to be a key driver for USD strength, although their long-term effectiveness is questioned due to potential delays and uncertainties surrounding their implementation [8][14] 3. Currency Forecasts: - EUR/USD is projected to reach 0.99 in Q1 2025 - USD/JPY is expected to be 148 by Q4 2025 - AUD/USD is forecasted at 0.65 in Q2 2025 - USD/CAD is anticipated to be 1.45 in Q2 2025 [4][62] 4. Long-term Risks: Potential long-term bearish drivers for the USD include geopolitical factors such as a cease-fire in the Russia/Ukraine conflict and shifts in US growth relative to the rest of the world [4][12] 5. JPY Dynamics: The Japanese yen is highlighted as a currency to be overweight on crosses, with expectations of a gradual recovery due to rising policy rates in Japan relative to the rest of the world [10][23] 6. GBP Weakness: The British pound is facing downside risks due to a dovish Bank of England and weak growth indicators, with the EUR/GBP pair returning to fair value [24][26] 7. CHF Sensitivity: The trajectory of EUR/CHF is expected to be influenced by European tariff narratives, with the Swiss economy vulnerable to trade wars [29][30] 8. NOK and SEK Outlook: The Norwegian krone is supported by favorable terms of trade and domestic growth, while the Swedish krona is seen as vulnerable against the USD but not as much against the EUR [32][36] 9. AUD and NZD Performance: The Australian dollar's upside is capped despite a reduction in acute shock risks, while the New Zealand dollar faces ongoing rate cuts that may restrain any tariff relief [38][43] 10. CAD Concerns: The Canadian dollar is downgraded due to soft domestic growth and lingering tariff threats, with expectations of a significant negative shock if tariffs are fully implemented [48][50] Additional Important Insights - Market Volatility: The document notes that the FX market has experienced volatility due to tariff announcements and geopolitical tensions, impacting various currencies differently [43][50] - Hedging Strategies: Recommendations include hedging against potential market drawdowns through specific currency options and risk reversals [51][56] - Global Carry Strategies: There has been a slight rebound in global carry strategies, particularly in emerging markets, indicating a shift in investment focus [57][59] This summary encapsulates the key points and insights from the FX Outlook Presentation, providing a comprehensive overview of the current state and future expectations within the foreign exchange market.