FX: Dollar Bounce Underwhelms

In our Timing the Tantrum cross-market piece, we also highlighted how the FX market might perform if the Treasury sell-off escalated into a full-scale tantrum similar to the one seen in 2013.

There have been instances where a repeat of the 2013 sell-off has started to reappear – especially in high yield emerging market FX such as the South African rand as Turkish lira. However, EM economies have more stable external positions than those seen in 2013 and we would not expect to see a repeat of the 15-20% adjustment suffered by the most vulnerable countries back then.

Instead, we think position-adjustment would play a greater role today, with those most exposed to a further Treasury sell-off such as the heavily-backed Czech koruna in Europe, or the Korean won in Asia – the latter being exposed to equity outflows.

Yet our base case is that the recovery/reflation trade dominates in 2021, such that any corrective dip in currencies exposed to the global business cycle (including the EUR) proves short-lived and 5-8% rallies are achievable by year-end.

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