The Trump-inspired USD rally is about three weeks old and we have already exceeded the highs from late 2015 and early 2016 on a tradeweighted basis. Naturally, the question now becomes how much further can the USD appreciate and which G10 currencies should be most vulnerable. To answer these questions is complicated, not the least given that the considerable uncertainty that still hangs over the main driver of the latest FX appreciation – the prospect for aggressive fiscal stimulus from the Trump administration.

The fiscal policy outlook uncertainty notwithstanding, the scope for further USD-strength will also depend on the prospects for further Fed tightening. As it stands, the rates markets are still pricing c.40bp less cumulative rate hikes by the end of 2018 compared to the FOMC’s dot plot. Using historic correlations between USD TWI and the spread between US 2Y rate and the G9 average rate would suggest that a convergence of the market and Fed rate expectations could drive USD TWI c.3% higher from here. Absent of any significant disappointments from next week’s non-farm payrolls and ISM, further re-pricing of longer-term Fed rate hike expectations could push USD higher still.

JPY and the antipodeans had to bear the brunt of the recent USD strength. The main drivers of the USD/JPY remain the Nikkei and US yields. Constructive Japanese data next week will remain good news for Japanese stocks. This should help push the USD/JPY higher along with higher US rates. There is some modest upside risk to the Australian economic data with the main focus likely to be private-sector capital expenditure data. While the data and iron ore prices could provide near-term support for the AUD, rallies in AUD/USD will present opportunities to sell. We went short AUD/USD*

EUR/USD was brought to its knees by a double whammy of resurgent USD and growing political risks in the Eurozone. This may change a little in the coming days with investors remaining cautious ahead of the Italian referendum on 4 December.

CAD outperformed other commodity currencies in part due to the recovery in oil prices ahead of the OPEC on 30 November. The market has already priced in a reasonable chance of a production cut so that the bar for a CAD-positive surprise is high. Potential disappointment from Canadian GDP could leave it vulnerable to a renewed bout of weakness against USD was well.

Last but not least, still sizeable market shorts continue to make GBP the least vulnerable currency against USD. Potential disappointments from next week’s UK data could put the GBP resilience to the test, however.