The first signs of dollar weakness

investment insights

The first signs of dollar weakness

Vasileios Gkionakis, PhD - Global Head of FX Strategy

Vasileios Gkionakis, PhD

Global Head of FX Strategy

There are increasing signs that the US dollar is gradually coming under pressure. Since mid-December, the Bloomberg trade-weighted (TW) USD index has fallen 2.2% with broad losses against G10 and emerging market currencies.

We believe this new theme of dollar weakness will stay with us for most of 2019. We expect that the market will price out its “unrealistic excitement” over the US fiscal stimulus and refocus on the US’s twin deficit problem and mounting dysfunctionalities in Washington.

We expect that the market will price out its “unrealistic excitement” over the US fiscal stimulus and refocus on the US’s twin deficit problem and mounting dysfunctionalities in Washington.

Eventually, US-Rest of World (RoW) yield differentials should narrow to levels consistent with relative economic developments.

We remain bullish on the euro. So far, EURUSD’s modest upside is all about USD weakness and lacks idiosyncratic factors. The deceleration in regional growth has likely spooked investors but we anticipate a growth rebound that should provide a more convincing and sustained impetus to the currency.

Following recent Brexit developments, the environment is turning constructive for GBP (in line with our medium term view) but an extension of the Article 50 deadline is now likely.

Following recent Brexit developments, the environment is turning constructive for GBP (in line with our medium term view) but an extension of the Article 50 deadline is now likely.

While this should be fundamentally positive for the currency, it implies a longer period of negotiations and uncertainty during which we cannot rule out tail risks. We keep our bullish end-2019 view for GBP but have trimmed our 1Q 19 and 2Q 19 forecasts to 1.32 and 1.35 to reflect this prolonged uncertainty and volatility.

While we maintain our bearish stance on USDJPY, the very rapid depreciation since December suggests a near-term consolidation as the currency pair stepped into oversold territory.

Turning to Switzerland, we continue to expect a modest and gradual depreciation of the franc, as the SNB retains a firm dovish stance and the expected rebound in euro area activity should act as a catalyst for Swiss investors to slowly direct flows to the region.  On the Nordic front, we reiterate our constructive view because we believe monetary policy expectations are under-priced in both Norway and Sweden.

Moreover, we advocate a positive but selective positioning on the commodity FX bloc

Moreover, we advocate a positive but selective positioning on the commodity FX bloc: we see upside in CAD (partly due to the rebound in oil prices, which we expect, will continue further) and AUD (where we see market expectations for a rate cut in 2019 as too exaggerated). NZD, however, is likely to lag.

Finally, in China, and following the recent rally in CNY, we have fine-tuned our renminbi  forecasts: we see the outlook for the CNY neutral in the near-term, but trade dispute resolution could lead to its substantial strength.

Read the full report here (link to PDF)

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