In our FX review this week we talk about whether the US Dollar is going to start another bull run, the impact of oil gains on commodity FX, and why we still like being short the Swiss Franc.

Another USD bull run coming?

The main question being thrown around last week was whether the USD could be due another rally. This comes off the back of two key points from the week. Firstly, on Tuesday we had Fed Chair Powell talking. He was in an optimistic mood, in fact he declared that the US economy is “healthy enough and in need of tighter monetary policy.” We reviewed his comments in more detail that can be read here.

On Wednesday we got the US inflation reading for December, that came in at 7%. Sure, this figure was as expected by the market. However, we note that this is still a gain versus the previous month of 0.2%. It is also still much too high for comfort for consumers within the US. 

We think that a combination of both of these factors should lead to a stronger USD in coming weeks. We did start to see a move on Friday in this direction, which we jumped on earlier in the week via a short GBP/USD position. Even though we are longer-term GBP bulls, the failure to break above the 200DMA and these USD stories lead us to conclude that a correction lower could be due.

Oil moves higher 

We’ve also noted the strong gains in oil since we started the year. WTI Crude has rallied in recent weeks from around $70 to bounce easily above $80. Double digit percentage gains have helped NOK, SEK and CAD in particular. However, we’d be cautious about chasing this move higher still. 

When we have the backdrop of a potentially stronger USD, we’d much prefer to sell CHF or JPY and buy CAD or NOK. However, even with a global rebound in demand for refined oil products, we’re not sure how much further this oil move has to run in the short term. Therefore, we’d prefer to wait on the sidelines for a correction before thinking about getting involved here.

Being long risk 

We continue to be happy to take on risk, even with a more uncertain picture being flagged up in the equity markets. Fixed income yields provide more positive news in our view. As a result, we like to play this by being short a safe haven currency, such as CHF. In fact, we’ve reestablished our long EUR/CHF trade again.

Of course, holding CHF or JPY can be a good hedge alongside existing equity portfolios. However, for the purposes of our FX review, we like to look at our FX positions in their own right. It’s up to each reader to apply how the points would relate best to their overall cross-asset portfolios.

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