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USD index expected to decline 2% this month from current levels - J.P. Morgan

FXStreet (Łódź) - The J.P. Morgan team of analysts see the USD correction in October as limited and narrow.

Key quotes

"Finally, after three consecutive monthly advances, the dollar index and FX volatility have started to stabilise."

"Given how levered manager returns seem to be to the dollar's trend, 2014 performance will probably be determined by how much and how broadly the dollar corrects lower."

"The base case is for a roughly 2% decline in the USD index this month from current levels, with funding currencies such as JPY, CHF and EUR the beneficiaries (in that order); and stability at best but probably further declines in the commodity
currencies/high-yielders, barring local wildcards in places like Brazil."

"Such a move would still leave the dollar overbought on short-term models, but apparent mispricings like this can persist for several months."

"The global wildcard is the Oct 29 FOMC statement. Until then, stay long USD vs commodity FX and Europe (mainly in options), despite short-term squeeze risk on the latter."

"The dollar’s problems are temporary and borne of an excessive investor enthusiasm (positions, cyclical valuation) and aggravated by a rotation of data surprises and a neurotic Fed."

"Hold strategic USD longs (6-mo options in EURand NZD; GBP and COP cash) and look to re-enter cash trades that were stopped this week (EUR and SEK) should the dollar decline another 2%. RV trades (long in AUD/NZD and NOK/SEK) have struggled – liquidity again seems the main issue for NOK, although oil needs to stabilise soon to avoid
greater damage. Hold CNY for idiosyncratic carry."

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