A series of events have turned the tide and restored investors' appetite for the US dollar, which has seen a strong turnaround. According to our models, relative rates (higher US interest rates) and a lower oil price are the two main explanatory factors.
In particular, USD/JPY appears to be exposed to a short-term correction. We recommend leverage funds sell 1M USD/JPY risk reversals to position for a possible correction lower.
Over the coming three to six months, our models suggest that relative rates ahead of a first Fed hike in September imply broad-based USD strength, projecting that EUR/USD will dip below parity in 3M (Danske 3M forecast: 1.08), USD/JPY will edge above 130 (3M forecast: 125), whereas GBP/USD should stay above 1.50 (3M forecast: 1.52).
We recommend leverage funds utilise a possible bounce in EUR/USD to go short while euro-based real-money funds should lower hedge ratios on US assets. We recommend hedging US dollar assets via 12M risk reversals.
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