Conference Presentation, Statement
Mid-year review
- US economic resilience is expected to drive the US dollar out of its current range in the near term, with a base case of three rate hikes and seasonal factors supporting further appreciation through May and the third quarter.
- US dollar index forecasts target 115 by the end of 2026 and a rise to 120 in 2027, with the window for long dollar positioning expected to close after the third quarter as positioning becomes extreme.
- Fed policy is projected to include three rate hikes in the current year followed by a hold through the end of 2027, with subsequent rate cuts anticipated after restrictive measures take effect.
- US Treasury yield revisions project the two-year rate ending 2026 rising from 3.9% to 4.5% before declining to 4.25% by end-of-2027 and 4% by end-of-2028, while the 10-year yield is forecast to increase slightly from 4.25% to 4.5% by year-end with a flat curve.
- US rates are expected to outperform most other developed markets, though a divergence in growth towards the rest of the world is anticipated to weaken the dollar environment in 2027.
- EUR/USD is forecast to decline to 1.12 in the third quarter, while the ECB faces a risk of skipping a September hike due to energy prices, and the Bank of England is no longer expected to hike rates in this cycle.
- The Reserve Bank of Australia is viewed as likely done hiking with only a residual risk of one more increase, whereas the Canadian Bank is not expected to hike further, potentially leading to US rates rising relative to Canadian rates and a steepening of the Canadian curve.
- The Japanese yen is expected to strengthen on a more balanced balance of payments and potential shifts toward conservative fiscal policy, while the Swiss franc is identified as the most attractive funding currency for volatility-adjusted carry strategies.
- Carry trades are predicted to underperform in August due to positioning and volatility, whereas the GBP/USD pair is expected to experience increased volatility approaching US midterms and may serve as a hedge for the upcoming UK budget event.
- Macro factors including tax refunds, wealth effects, and the World Cup are expected to fade by the fourth quarter, potentially leading to a convergence in global growth and an oil market surplus with prices near $60 in 2027.
- A longer-term strategic shift for European investors to reduce US asset overweights is anticipated to materialize primarily as a 2027 narrative rather than in 2026.
- Risks include the potential for one additional rate hike by the Reserve Bank of Australia and market uncertainty regarding the dollar outlook beyond the third quarter as constructive signals fade.