Market focus has quickly shifted from the post-COVID-19 recovery to Biden’s outsized fiscal stimulus and the increase in US yields that couldunleash.

Higher US yields were always part of the baseline, but this is now expected earlier in the year following Georgia.

All else equal, this should entail a stronger USD but there are nearterm offsets—the Fed is expected to refrain from tapering till year-end, US real yields are still low, and growth outside the US is still inching up……however, recent developments reinforce our previously outlined view that dollar weakness in 2021 will be less vigorous, less consistent and less uniform compared with the sharp initial V-shaped growth rebound in 2020.

We continue to recommend pro-growth trades, but with reduced USD exposure. In G10, we unwound short USD/JPY given its sensitivity to US yields and stay long NOK as the primary reflation candidate… …in EM, we hold a basket of overweights across high yielding oil currencies and pro-growth proxies but cut exposure in half.

A core theme that runs through both G10 and EM is to be long petro- FX (NOK, RUB, COP, MXN). This was even prior to the Saudi announcement to cut supply which boosted our year-end Brent forecast to the high $60s/bbl.

Broad-USD forecasts have are marked down but still maintain only a slightly downward trajectory by year-end (-1.3% from spot).

In G10, EUR/USD and USD/JPY 1y target unchanged at 1.18 and 98, respectively. Keep cautious GBP forecast (EUR/GBP at 0.89, GBP/USD at 1.32). Commodity FX upgraded on higher terms of trade. AUD and NZD targets still bearish (0.71 and 0.66 for 4Q, respectively). EUR/NOK at 10.0 and USD/CAD at 1.22 (all 4Q).

In EM, USD/CNY forecast remains 6.25 but is brought forward from 4Q21 to 2Q. Year-end forecasts in Latam are upgraded vs USD. USD/MXN and USD/BRL at 20.0 and 5.40, respectively.