The firm's initial 2026 forecast shifted from bearish to bullish on the dollar due to US economic exceptionalism and yield supremacy, while maintaining a positive view on beta trades like FX carry. This dual-bullish stance is unusual and forms their core macro theme.
The typical pattern preceding the first Federal Reserve rate hike in a cycle involves the dollar strengthening significantly in the six months prior. This historical precedent provides a clear, tactical playbook for being long the dollar ahead of anticipated tightening.
Despite positioning, stretched valuations, and slowing data suggesting a weaker Chinese Yuan (CNY), strong policy support via fixings and the geopolitical imperative of a potential presidential summit are expected to keep the currency moderately strong, creating a key market tension.
Japanese authorities will likely cap the size of any currency intervention to avoid creating a perception of dwindling FX reserves. This strategic limitation means intervention is unlikely to be large enough to halt the Yen's fundamental downtrend driven by Fed hikes.
With FX volatility at multi-year lows, traditional volatility-selling strategies are not recommended. Instead, the optimal approach is to use options to exploit specific currency pairs with exceptionally high carry-to-volatility ratios, such as Sterling/Swiss, for superior alpha generation.
Hungary's push for Euro adoption makes a strong Forint (HUF) a key government policy. FX strength is necessary to lower inflation and reduce the fiscal deficit, helping to meet the Maastricht criteria and making currency appreciation a strategic government objective.
The influence of AI on FX is shifting from a simple risk-on driver for carry trades. As The US uses AI for geopolitical leverage via export controls, it could widen economic divergences with other nations, creating a 'US exceptionalism' scenario that is bullish for the dollar.
Analyzing historical Fed hiking cycles provides a quantitative framework for the dollar's trajectory. A conservative 75 basis point cycle, combined with the dollar's historical beta to rates and its current cheapness versus rate models, suggests a reasonable base case of 3% appreciation.