Will the Dollar Keep Dropping?

Market Rally Assessment:

• The post-April risk asset rally has been strong, underpinned by exceptional earnings, deregulation expectations, and the AI theme.
• Kunal Shah views the rally as well-grounded fundamentally but notes technicals are becoming less compelling as systematic, institutional, and corporate buying have covered much of their underweight positions.
• Shah expressed caution regarding "meme stock mania" and market froth, describing it as a signal to become "a bit more defensive," humorously noting the timing coincides with his upcoming holiday.

U.S. vs. Europe and "Exceptionalism":

• The previous "U.S. exceptionalism" trade faces challenges as Europe emerges as a fiscal alternative, though Shah questions the sustainability of a broad "Europe exceptionalism" trade.
• Europe's fiscal expansion (specifically Germany's bold budget moves) creates pressure on bond yields due to expected high issuance for infrastructure and defense.
• Equity outlook for Europe is mixed: Germany is forecast to grow at 2% by mid-next year (outpacing the U.S.), but France faces budget difficulties and the UK has significant trade-offs.
• The Euro/Dollar (FX) trade remains a key focus; while ECB tightening may be complete, upward pressure on the Euro is expected to resume as the Fed moves to cut rates.

Central Bank Policy Expectations:

• ECB: The bank has finished its hiking cycle; no further policy changes are anticipated in the immediate short term.
• Federal Reserve: Market pricing for a rate cut next week is deemed "highly unlikely" to align with actual Fed action; however, a path to normalization is clear via the "dots," with cuts expected once data provides a "green light."
• Bank of England: Shah advises fading the "receive rates" trade in the UK; while markets price a drop from 4.25% to 3.5%, the neutral rate is estimated at 2.75%, and the BoE is expected to cut rates to support sluggish growth despite temporary inflation humps.

China Investment Outlook:

• China's H1 GDP growth was 5.3%, boosted by front-loading prior to tariffs and stimulus programs like "cash for clunkers," but H2 growth forecasts are expected to be weaker.
• Structural investment cases for China remain limited due to unresolved housing issues, though equity sentiment is positive driven by AI and tech themes.
• Currency Trade: The Renminbi (RMB) is viewed as having upside potential; Goldman Sachs forecasts the RMB trading down to roughly 7.0 against the dollar over the next few months.
• There is no capital outflow pressure on the RMB; instead, inflows are occurring, prompting policymakers to smooth the currency's appreciation to support "anti-involution" efforts.

Specific Trading Positions and Forward-Looking Views:

• Top Trades: Short dollar/Renminbi in Asia; long side in Euro/Dollar; "fade receive rates" in the UK curve (selling the front end).
• Key Events Next Week: Traders await final clarity on U.S. trade deals (Japan deal done, EU deal details pending) and the Fed's FOMC meeting, specifically the press conference guidance for post-summer rate cuts.
• Risk Warning: The speaker notes that overshoots in risk assets can persist, and the end of U.S. exceptionalism requires a viable alternative, which is currently uncertain given Europe's mixed economic fundamentals.