Recently selective tariff actions have had more idiosyncratic FX impact than the uniform “Liberation Day” tariffs, which were broadly USD-negative. There is little visibility on tariff end point. More generally the impact of tariff headlines on financial markets has been waning since April. Will Aug 1 provide some finality? Unlikely in our view given the “skinny” nature of trade deals so far and the US stating that tariffs can be changed after the deadline. For short term, we see DXY retracing back to 100 odd levels due to markets being one sided in USD bearish positioning. Some signals have become less USD-bearish or even bullish, which could mean consolidation in the near-term in the broad range of 95-100 but we see 100 first than 95 later in short term. So far YTD, the USD TWI is down 6%, while DXY has delivered a full 10% depreciation. That’s the weakest 1H DXY performance going back to at least 1980, and so it’s not unreasonable to expect some consolidation. Market focus has shifted from internalizing the various channels driving USD weakness, to stress-testing whether USD is due for consolidation or even a rebound, particularly ahead of key tariff announcement dates. Our systematic models have turned slightly USD-bullish on a few metrics (growth/ equities signal as well as EM FX being over valued at current levels). We expect EUR testing 1.15 levels this week from CMP of 1.1689. A 30% tariff was not priced in current levels of EUR. Other factors dampening EUR's upward momentum would be ECB officials curbing EUR strength (e.g., de Guindos, Simkus, Villeroy). We expect JPY to be range bound this week between 145-147 levels & don’t have a strong view yet. We expect a stronger than expected CPI data in UK on 16th July (on account of higher food prices) for June leading to GBP strengthening post CPI data on Tuesday. With a stop at 1.3450, we target 1.36 levels this week on GBP. CMP is 1.3493. We don’t have a strong view on AUD at current levels. For short term CNH remains range bound between 7.15-7.30 levels in absence of any news triggers though there is some talk of a new set of stimulus measures being discussed. CAD we are slightly bearish due to 35% tariffs from Trump. So, CAD around 1.36 might be an opportune time to enter short CAD. (CMP is 1.3692). Stop should be previous low of 1.3550. Profit target could be 1.38 levels. This Tuesday’s CPI data along with tariff headlines might give direction to DXY. Although we expect a soft CPI MoM at .24%, market positioning of DXY is one sided right now. Also, the possibility of Trump announcing tariffs on crude importers from Russia on Monday is likely to keep DXY strong on geopolitical risks.
