Global FX Strategy_FX Compass_ Back to the future

Summary of Global FX Strategy Conference Call Industry Overview - The report focuses on the foreign exchange (FX) market, particularly the dynamics affecting major currency pairs such as EURUSD, USDJPY, and others, in light of recent geopolitical and economic developments. Key Points and Arguments Currency Forecast Adjustments - EURUSD Forecasts: - Upgraded end-2025 forecast to 1.12 and end-2026 forecast to 1.14, reflecting a more bullish outlook compared to previous estimates of 0.990 and 1.000 respectively [2][10] - Short-term retracement expected due to potential US reciprocal tariffs against the EU [2][9] - USDJPY Forecasts: - Lowered end-2025 target from 150 to 140 and end-2026 target from 145 to 130, aligning closer to long-term model fair value of 126 [20][25] - EURCHF Forecasts: - Revised upward to 0.9700 by end-2025 and 1.0000 by end-2026, indicating a shift in sentiment towards the euro area [24][25] - Commodity Currencies: - Increased forecasts for commodity currencies like NOK and SEK due to USD weakness, with projections of EURSEK at 10.60 and EURNOK at 11.30 by end-2025 [4][27] Geopolitical and Economic Influences - US Developments: - Factors such as DOGE and President Trump's tariff focus have negatively impacted US growth exceptionalism, leading to a reassessment of USD strength [10][8] - Concerns over potential US tariffs against the EU could create short-term volatility in the EUR [9][10] - German Fiscal Stimulus: - A significant constitutional fiscal easing in Germany is expected to tighten ECB policy in the medium term, supporting a stronger EUR [10][8] Market Sentiment and Positioning - Market Reactions: - The market has shifted from a negative outlook on Europe to a more optimistic view due to anticipated infrastructure and defense spending [10][11] - Risk reversals indicate that the positive shock factor for EURUSD is already priced in, suggesting limited room for further gains in the near term [12][18] Trade Recommendations - New Trades: - Suggested to buy a 3-month EURUSD 1.0800 call with a knock-in at 1.0630, capitalizing on current market conditions [17][18] - Recommended a basket trade of long EUR and JPY against short CHF and GBP to capture structural changes in fiscal and monetary policies [23][25] Risks and Considerations - Short-term Risks: - The potential for a US-Canada trade war and its implications for CAD and overall market sentiment remain a concern [34][35] - The impact of geopolitical tensions and tariff negotiations could lead to increased volatility in the FX market [48] Other Important Content - Long-term Outlook: - The report emphasizes a return to pre-election forecasts, suggesting that the market is adjusting to new realities in US and European fiscal policies [8][10] - Valuation Method and Risk Statement: - Acknowledges risks associated with multi-asset investing, including market, credit, and foreign exchange risks, highlighting the importance of monitoring geopolitical events [48]