The US exceptionalism narrative has faded, but the diverging monetary policies theme continues to be worth watching. After the BoC tapered QE and signalled a rate rise for H2 2022, divergence was evident. RBA, however, indicated no rate rise before 2024. The Q3 AUD/CAD trade may have been a catch-up trade with BoC tightening pricing into the currency. However, strong Aussie data (employment) could see the RBA bring forward rate increase expectations.
My view is that USD may rise from the current levels. As evidenced by CFTC data that shows the increase in net short positions, the consensus trade over the past year was to short USD. The FOMC’s hawkish pivot, in which the dot-plot projections now see two rate increases in 2023 from zero suggests that the central banks’s reaction function has changed, with FOMC more unwilling to allow the economy run hot. These conditions will make economic data more important and cause volatility in data releases.
The Jackson Hole Symposium, which marks one year since AIT was launched, and the September meeting of the monetary committee are the key dates for monetary policy. An unwind could fuel a longer rise in the USD, given the large net short USD position. We are heading towards a Q3 taper signal. This is not the only reason why the “demise” of the dollar reported late in Q2 and coincided with the low point of the greenback. This could indicate that there would be a stronger USD pain trade.
