Market expects continued deleveraging in the near term to weigh on FX price action. This is likely to lead to further Dollar strength pretty much across the board to some extent or other except against the Yen, which itself has been a key beneficiary of the deleveraging theme. Thereafter macro influences are likely to take centre stage leading to a reversal of at least some of the “outsize” Dollar moves witnessed in recent months particularly against the back drop of a relatively more difficult macro environment in the US.
Under this scenario expect EUR/$ to trade at 1.20, 1.30 and 1.30 in 3, 6 and 12 months and USD/JPY to trade at 90.0, 100.0 and 105.0 over the same horizons.
Market wil be watching developments in the credit market closely to assess the risks. Firm and sustained evidence that credit is starting to flow again is likely to be a key signal that the deleveraging process is coming to a conclusion and may well be the trigger for the macro back drop to be a more important driver of FX.
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