Investing.com – Citi Research has become increasingly bearish on risk and recommends selling any rallies.
At 07:00 ET (11:00 GMT), EUR/USD was trading 0.1% higher at $1.0926, after falling around 0.3% over the past week.
The US bank signaled last month that it was turning bearish on risks, citing the fact that volatility tends to move mechanically higher ahead of the US election and concerns that the US was heading for a recession. Nonfarm payrolls reinforced this view as markets reassessed the likelihood of a hard landing.
This initially caused the safe haven FX to perform better and allowed for unwinding in busy carry positions. This past week saw a reversal as higher beta FX (AUD, CAD, NOK, NZD) outperformed and lower yielders (JPY, CHF) lagged.
Citi claims that G10 FX will continue to trade to risk sentiment.
“Markets have reached an inflection point where the trading environment has become increasingly tactical and the catalyst’s focus has shifted from inflation to the labor market and growth,” Citi analysts said in an Aug. 12 note.
“The latter suggests that US retail sales and initial claims will be more important to the risk backdrop next week than US CPI,” Citi added. “There should be more clarity in the coming weeks.”
Citi has revised its Fed call and expects 125 basis points of cuts through the end of the year. With markets pricing in around 100 basis points of cuts over this period, this will lead to asymmetric muted repricing until further signs of stabilization emerge.
“Here we emphasize that a moderate repricing based on non-linear labor market weakness (USD+) is not the same as a mild repricing based on the confirmation of disinflation (USD-). The USD has demonstrably underperformed during this latest period of risk-off, but we remain bullish and are happy to sell any EUR/USD rally back towards 1.10.”
