USD to benefit on stronger cyclicals. But geopolitical tensions need to subside
We believe the US dollar should ultimately gain on rising yield related support in response to stronger US data and rising expectations of Fed tapering. But for this support to be sustained, geopolitical risk would need to remain contained. As we have pointed out in the past, the USD tends to react negatively to rising geopolitical tensions. This was in evidence with the USD rally (on a strong ISM) yesterday reversed after Republican John Boehner said he would back the President on limited military participation in Syria. Risk premia related to Syria (gauged through oil prices which continue to rise) would need to subside for the USD gains to remain in place. But such tensions could linger until closer to September 9 when US Congress re-convenes. Yesterday we added a long USDCHF recommendation (from 0.9365 targeting 0.9750 with a stop at 0.9210.
Read the full report: FX Daily
BNP Paribas