Dollar index and FX vols post largest and broadest rally since taper tantrum - J.P. Morgan

FXStreet (Łódź) - The J.P. Morgan team of analysts believe that the recent considerable rally of the Dollar Index and FX volumes has been taking place sooner than expected and for the right reasons.

Key quotes

"The US economy is reviving and inflation firming; a rich Treasury market is beginning to reprice at the front end; currencies are responding to shifting rate differentials; and abnormally low volatility is starting to reflect emerging risks."

"The short-term call is harder than the medium-term one."

"If the US economy is indeed breaking out in H2, the resulting monetary policy divergences should allow the USD index to trend beginning in Q4."

"The next few weeks probably bring consolidation, however, since payrolls wasn’t impressive enough to
sustain the rise in 2-yr rates and there is little drama amongst the non-US economies and central banks."

"The broader message is the window is closing on a short dollar/long carry trade which has been building for six months."

"Return to neutral overall in the Macro portfolio and stay long USD-based correlation in the Derivatives portfolio."