Dear Clients,
Below is a market forecast from our trade desk here at LTI.
Let’s start with this statement – It was a very confusing week last week. Therefore, our global economics team and our trade desk here at LTI have made some adjustments to our FX forecasts. Although these changes have taken place. Our FX positioning was perfect for the strong US data that emerged Friday, as our desk favored Dollar longs over an over-bought AUD. This position was initially a hedge against our long-term Dollar short positions (which we are still holding), in a bid to fade the dollar as FX positioning was quite lopsided, and short USD was a well-populated trade. However, after Friday’s strong US labor market data, we aim to hold our Dollar long positions for the short term. While any additions to our Dollar positioning, are now initially covered. With that said, regarding the FED and the ECB, we continue to see upside risks to both in the coming months. The upshot is that China is re-correlating the FX market to a single theme that should continue to work against the USD over the medium term. Short-term, a May pause is coming into focus, but significant strengthening in the labor market could push rate cuts back to Q1 of 2024.
Overall, we believe the FOMC supports the outlook of another 25 BP rate hike in March, to a terminal rate of 4.75-5.00%. However, after the upside surprise in the January employment report, a lot of investment banks have revised their economic outlooks, expecting a shallower recession of just two negative GDP growth in Q1 and Q2 of this year. We believe that the FED will hold at the terminal from May to Q4/ Q1 of next year.
AUD – Higher inflation and a still-tight labor market suggest that the board will likely need to hike twice more by 25 BPS in March and April, for a terminal policy rate of 3.85%. The economy is forecasted to grow by 1.5% over 2023. Our desk continues to evaluate incoming data and will re-adjust long-term FX positioning to suit longer-term economic trends.
Kind Regards,