Interview
“The most attractive hedge”
- The dollar is projected to depreciate on a trade-weighted basis over the coming months to years as investor confidence in US exceptionalism wanes, supported by fair value models indicating an overvaluation of 10% to 15% relative to late 2020 to early 2021 levels.
- Significant sell pressure is anticipated to materialize through corporate repatriation and hedging of long dollar positions, though these flows are expected to unfold gradually as C-level decisions take time to implement.
- Market drivers for further depreciation are identified as policy consistency from the US administration and the rollover of hard economic data, which may prompt Fed rate cuts if growth conditions deteriorate.
- The next two to three months are viewed as a potential acceleration period for depreciation trades, driven by the convexity of upcoming US data points.
- Shorting the dollar against the yen is highlighted as an attractive trade for the next handful of months, particularly for hedging traditional risk assets, with levels between 142 and 143 considered favorable on both short-term and long-term metrics.
- Japanese repatriation flows and hedging programs are expected to increase substantially due to fundamental dynamics favoring long yen positions.
- The dollar-yen pair is forecast to perform well if equities, credit, or the broader economy experience a downturn, due to the pair's positive correlation with these asset classes.
- Risks to the short-dollar view include a potential shift toward a more hawkish Fed reaction function, while market directionality remains unclear until the following month due to incomplete data regarding tariff impacts.