investment insights

    G10 FX Monthly: Pencilling in transitory USD resilience

    G10 FX Monthly: Pencilling in transitory USD resilience
    Vasileios Gkionakis, PhD - Global Head of FX Strategy

    Vasileios Gkionakis, PhD

    Global Head of FX Strategy
    Kiran Kowshik - Global FX Strategist

    Kiran Kowshik

    Global FX Strategist

    Key takeaways

    • The dollar is likely to stay resilient in the near term as the market continues to price in "2019-nCov"-related risk premia
    • However, our working assumption remains that the impact on activity and “dollar appetite” will be meaningful but transitory and not extend much beyond Q1
    • As a result, we have revised our EURUSD and EURCHF forecasts lower, the former also due to domestic developments
    • GBPUSD and USDJPY should continue to trade in a narrow range for now…
    • …while commodity-linked FX is likely to face some near-term headwinds owing to the immense declines in commodity prices, before recovering from Q2 onwards.


    The dollar has started the year on a strong footing, challenging our bearish view. The virus outbreak and associated pressure on risk assets – especially those closely linked to Chinese activity – have played a major role in recent currency movements. Specifically, the market has sought the safety of the dollar, fearing that the bottoming-out of global manufacturing activity – largely driven by the easing of the US-China trade tensions – may not last.

    The market has sought the safety of the dollar

    We reiterate our view that the overall impact is likely to be transitory and mostly visible in Q1 economic numbers. We expect a rebound – especially in EM growth – from Q2 onwards, not least because of a significant stimulus package by China. Nonetheless, near-term market sentiment may remain fragile and continue to price in a risk premium, keeping the USD stronger than we initially expected.

    This is why we have made some adjustments to our FX forecasts, while still anticipating a weaker USD trajectory towards year-end.

    In particular, we have trimmed our EURUSD forecasts to 1.12 by year-end, and have cut our targets for EURCHF to 1.10 by year-end. That said, we still see the USD weakening in 2020 albeit at a less pronounced pace. Central to these forecasts is our expectation of a modest rebound in emerging market growth over the year, which has historically been accompanied by dollar depreciation.

    We maintain our view of “range trading” for both GBPUSD and USDJPY over the next few months as we see both currency pairs subject to several offsetting forces. At the same time, the significant decline in commodity prices, led by energy, is bound to leave its mark on commodity-related FX. Although we have maintained an appreciating profile for AUD, CAD and NOK, the starting point is lower and more difficult to overcome than before. Consequently, we have revised our forecasts slightly lower.

    Pockets of EM currencies are still the most attractive places to be against the US dollar

    We still see pockets of EM currencies as the most attractive places to be against the USD. Looking through the temporary dampening impact of the 2019-nCov, EM activity should strengthen, helped by the normalisation in global trade and significant monetary and fiscal policy easing. If we are right, then high carry currencies such as the MXN, IDR and RUB should perform well in 2020, alongside the CNY.

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