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Since our last monthly publication in May, the dollar has continued to strengthen. The bulk of USD strengthening has come against EM currencies, but performance has outperformed most currencies in G10 as well. Regional divergences in G10 reflect EM biases with Asia-linked and defensive currencies (AUD, CHF and NZD) outperforming vs. USD in the past month, but Euro area-linked currencies (EUR and SEK) weakening the most.
The RBA is scheduled its monetary policy meeting this week (on July 3rd), the Aussie central bank is expected to hold cash rates at 1.5%. In our stances, the current levels of wage pressures and inflation will likely keep the RBA on hold for some time. The comment concerning the likely direction of the next rates move is not expected to be included in the statement despite some confusion in markets over its omission from the June minutes, but its 'absence' may not mean a lot.
The rankings of currencies on this framework are mostly unchanged this month. A shift has come from CHF, which given recent outperformance has ended up moving up in rank (from third cheapest currency to the fourth cheapest), but nonetheless, valuations are midrange rather than at extremes, thus leaving the currency with two-sided risks.
The cheaper basket continues to be dominated by SEK and GBP in G10, while the richer end of the spectrum still comprises USD, EUR and the Antipodeans. PetroFX in this framework continues to screen near fair value but still appear cheap vs. the Antipodeans (1st chart).
USD continues to grind gotten richer on the framework and is the richest G10 currency on a cross-sectional basis. Nonetheless, it still is 10%pts cheaper than 2016 levels indicating that there continues to be a two-way risk to the currency. Among reserve FX, despite the YTD weakness, USD continues to screen richer than EUR on this framework. Valuations for neither USD nor EUR are at an extreme yet. JPY is now cheaper than EUR, while CHF remains near fair value (2nd chart). Courtesy: GS
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