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Equity Rotation Impact: EUR/USD Nudges Higher Amid Dollar Softness

Equity Rotation Impact: EUR/USD Nudges Higher Amid Dollar Softness
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  1. FX Daily: Is equity rotation helping EUR/$?
    1. USD: Let's see if this dollar softness can extend

      FX Daily: Is equity rotation helping EUR/$?

      EUR/USD is nudging above 1.10 in quiet conditions. US interest rates are a little softer, but key drivers of EUR/USD such as interest rate differentials and energy prices have barely budged. Reports suggest that hedge funds may be rotating away from the narrow rally in US equities towards better valuations in Europe. If so, the dollar could soften further.

       

      USD: Let's see if this dollar softness can extend

      The dollar has started the week on the soft side. There has not been too much data but the push factor of the Fed/US interest rate story versus the pull factor of overseas asset markets is slightly working against the dollar. On the former, US short-dated rates came off 10bp in the European afternoon yesterday seemingly on the back of a New York Fed consumer inflation expectations survey that in the one-year tenor fell to the lowest levels since April 2021. The market seemed to ignore three Fed speakers all sticking to the script that the policy rate would probably need to be hiked another 25bp or 50bp this year.  

      And in terms of the pull factor, some very modest support measures announced for the Chinese property sector seem to be raising speculation that broader support for the private sector will be forthcoming this summer. Asian equities are modestly bid today. 

      However, a story that caught our eye in today's Financial Times may be partially explaining this soft dollar tone. The report suggests hedge funds have slashed their positions in US equities to the lowest in a decade and are turning their attention to under-valued European equities. Obviously, there are myriad factors that drive FX rates, but one can argue that the dollar trading to the weak side of what interest rate differentials suggest may be partially down to this kind of rotation. Remember that unlike bond market flows, equity flows are normally left FX unhedged.

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      Back to today and the best chance for this dollar decline to extend a little further will be the release of the NFIB small business optimism data for June. As our US economist James Knightley points out in our week ahead, a further decline in pricing intentions in this survey will add weight to the view that inflation is coming lower. (The main event, however, remains tomorrow's release of June CPI.)

      We do not expect big FX moves today, but DXY could continue drifting toward the 101.50 area.


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