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Flash: The Dollar Dilemma - Add Strategic USD longs - Nomura

FXstreet.com (Barcelona) - Nomura strategists note that this week was dominated by USD, which rallied stronger across both G10 and EM, while equities were mostly lower, other than in the US.

The begin by commenting that they revised their USD forecast several weeks ago to incorporate further long term USD strength. However, they add that they also indicated the EUR/USD could pop higher in the very short term, driven by better news of fiscal consolidation (less front loaded). They continue to note that last week, however, saw USD move higher, led by USD/JPY breaking 100 for the first time since 2009 on stronger US data and expectations of aggressive Japanese investment in foreign securities. Further, USD also gained broadly against EUR, AUD, GBP and CHF, as well as against EM. They write, “In relation to Europe, EUR/CHF and European stocks have been beneficiaries, while EUR/USD has fallen, driven by the broad based USD strength. Hence, we have decided to exit our upside EUR/USD tactical one-touch position.”

They continue, asking, “What about USD broadly?” They feel that the tensions between long- and short-run considerations on the USD outlook create a trading dilemma. The long-run story is clearly bullish, in their view, but the short-run story is much more mixed because of the potential for still-soft US data in the next few months. However, the note that there is a danger in being too short term focused. They write, “The turn in JPY has been quick and has demonstrated the importance of momentum when a multi-year cycle turns. Something similar could happen to the broader-based USD REER, which is still trading near the lows. As such, we have entered strategic long-term USD bullish exposure via options against EUR and CAD. We would look to add spot exposure should we reach better entry points over the coming weeks.”

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