Shrinking safe haven basket may shift flows to dollar bloc for yield - TDS

Mazen Issa, Senior FX Strategist at TDS, suggests that one implication from shrinking safe haven basket and negative yields is the increased relative appeal for the dollar bloc currencies (and some EMs).

Key Quotes

“While these economies are still dealing with the residual impact of a terms of trade shock and primarily perform in a risk-on environment, in a world with much of the sovereign curve yielding negative and investors looking for political stability, it would not surprise us that fixed income managers will look to high yielding FX to generate alpha strategies. Though the risk of prospective cuts remains especially for AUD and NZD. Thus far, portfolio flows into CAD, AUD and NZD have been relatively robust, even despite the risk of a credit downgrade for Australia.

And, while a broader theme of risk off presents a threat to this rotation, we view this as a slow burn story. It is also worth noting that despite the negatives that surround the AUD for instance, net foreign buying remains solid despite record issuance. This may complicate the adjustment for these regional economies from a structural point of view, but it may be the case that scope for performance is more appealing as a reach for yield (for instance, AUDCHF) as opposed to outright against the USD.

Overall, we are biased to see USDCHF higher particularly on dips towards 0.95, and CHFJPY pressured from a strategic point of view. Look to sell on rallies towards 107.11.”