USD bias over H2 is bullish - SocGen

Vincent Chaigneau, Research Analyst at Societe Generale, suggests that the powerful USD rally of 2014-2015 is over.

Key Quotes

“Yet the forces that drove the dollar down in H1 – a sharp US growth downgrade, the Fed repricing, the oil rally, diminishing Chinese hard landing fears and a global position clean-up – are all running out of steam. Our bias over H2 is bullish, though valuation, disappointing US growth into the election and a global policy aversion for excessive dollar strength all suggest USD gains will be limited.

In a low growth and highly leveraged world you would not expect financial volatility to be low for long. But H216 will see a ceasefire in the currency war. In H114, a pause in monetary policy activism caused a collapse in FX volatility. Expect FX vols to catch up to the downside (relative to rates and equity vols) if the UK decides to stay in the EU. As such, we like to Buy a EUR/USD double no-touch.

Will falling volatility support the FX carry trade? Only selectively. The antipodeans remain exposed to disappointing economic news in China, as the H1 relief, supported by yet another lending binge, has run its course. AUD and NZD are our least preferred G10 currencies over H2. We like to cheapen AUD puts with a KO and USD/JPY calls with a KI. Look to reopen GBP shorts vs USD & SEK after the UK referendum. Expect AxJ (Asia ex Japan) currencies to lag in H2 relative to Latam and CEEMEA as the CNY anchorage proves increasingly wobbly.”