Dollar correction looks limited, but carry trade interest should remain – ING

The dollar sold off around 1% across the board on yesterday's softer-than-expected July CPI number. Nonetheless, economists at ING expect the greenback to remain supported on dips.

Counter-trend dollar sell-off won’t last

“It seems it is too early to expect any sustained downside move in the short end of the US Treasury yield curve. And historically (since the 1980s) the US 2-10 year US curve has struggled to invert more than by 50 bps. That suggests limited downside for US yields from here (including the US 10-year), which would favour positioning back into long USD/JPY.”

“Expectations of quiet summer markets have seen expected volatility priced through the FX options market continuing to sink further. This will favour the carry trade and we could see fresh interest in pairs like long MXN/JPY which could push to the 6.80 area this month.” 

“The low-yielder weighted DXY should find good demand below 105 and we would favour a recovery back to the 106.00/106.30 area.”