Not unexpected against the backdrop of a high-risk NFP event later in the New York session, an awkward silence is consuming the market as the spectators bide time by shuffling in and out of quick punts while flipping policy USD coins between Esther George + 5% well into the 2024 call or James Bullard, who thinks that rates are reaching a "sufficiently high level." But the mood music points to higher for longer.
We are still waiting to see the significant broad US dollar downtrend everyone expects in 2023. However, to become confident dollar bears, you must passionately believe that global macro conditions, especially in the Eurozone, are shifting from a stagflationary to a reflationary environment. And this would equate to a US bull steepening driven by real rates and an incontrovertible low in equities.
In the meantime, USD as a high-yielder still carries some weight, so until Fed signals" Checkmate on Inflation" and allows for a more conclusive dollar turn, the set-up still suggests a very choppy start to the year for G-10 currencies.
However, it is an entirely different kettle of fish in Asia, where the early FX birds have certainly gotten the worm. The most significant developments have been the policy pivots in China and Japan, which both came months ahead of expectations. China has now fully taken to pieces three years of zero-Covid policies in a matter of weeks, and BoJ may be embarking on its first normalization cycle in years. China and Japan were both stalwarts of monetary easing and FX weakness in 2022 and contributed to much of the downswing in Asia FX. Still, with China and Japan moving towards normalization far ahead of expectation, this represents a significant trend reversal in the backdrop for Asia in 2023.
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