FX Talking: Tight Defence, Star Performers

The dichotomy between politics and monetary policy remains the central theme in FX. President Biden's debate fiasco and growing pressure on him to step down might encourage more pre-emptive rotations into the dollar in parallel with rising bets on a Donald Trump re-election, which is widely perceived as a positive for the greenback. That said, we suspect US macro can continue to be a bigger driver of the FX market in July and August. On the back of our economists' call for softer US data and a September Fed cut, there is room for selective performance in some procyclical currencies.

On the other shore of the Atlantic, French bonds have taken a breather after the election resulted in a hung parliament. We are not sure this calm will last, though, as fiscal concerns may end up being exacerbated by the political gridlock. We believe that means that the upside for EUR/USD is very limited despite the supportive Fed story.

In the rest of G10, we continue to like the Norwegian krone over the Swedish krona, and the Aussie and Kiwi dollars over the Canadian dollar. The highly undervalued yen may also start to recover as the Fed-BoJ gap could shrink. In EM, CEE currencies are looking generally attractive as central banks turn hawkish, and ZAR could find some more support. Domestic political uncertainty means a very tight window for gains in MXN and BRL, while some Asian currencies can have a few decent months before the US election.

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