The consistent market moves in the past few weeks have been the recovery in equities and the unwinding in the more common short USD positions (such as against EUR and JPY). This has emerged from the stronger key US economic data over the past week, but also the positive Trump comments on trade deals, stimulus & Trump positive talk on US equities. If we look at the five weeks since the reciprocal tariff announcement, it can be split into two distinct periods. Prior to the “pause,” the Dollar depreciated mostly against other safe havens. But over the past three weeks, a succession of EM currencies has led the way. We now expect to see CNY strength given the recent direction of policy negotiations and broad Dollar depreciation. We like to remain long JPY against USD. Broadly JPY hedge profile is same as TWD and hence it is a matter of time before the TWD rally resumes into JPY rally too. EUR we remain +ve medium term but are looking for opportune entry point. We also like AUD as it might be the next risk on as well as risk off fx. We are bearish on CAD and CHF. GBP we are mildly bullish in extreme short term. We expect the next leg of dollar weakness will start from flow of incremental allocation towards EUR/JPY/AUD. We expect this reallocation to show through a shift in marginal demand, rather than a disruptive sale of existing US assets.
