BNP FX Strategy (this via eFX)
We believe the recent USD weakness is unwarranted, especially compared to the gap that has opened up with relative interest rates. USD long positioning has moderated significantly and now stands at just +1 on our +/- 50 BNP Paribas Positioning scale, the lowest level since the US election.
Furthermore, stronger US data and upside inflation surprises indicate that markets are underpricing Fed rate hikes for 2017 and 2018.
We therefore think this is an opportune time to reload USD long exposure. We keep USD longs (via options) versus the JPY, EUR & CAD.
The risk to the bullish USD view likely surrounds the unpredictability of the new US President. It may take time for Trump and Congressional Republicans to agree on tax plans. Furthermore, consumers and businesses may be more optimistic, but are choosing to wait to see how policy plays out before committing actual money.
Still, we believe these risks are balanced by the light USD positioning, strong economic fundamentals and near-term USD undervaluation.