perspectives d’investissement

    The dollar at a tipping point as recovery begins

    The dollar at a tipping point as recovery begins
    Vasileios Gkionakis, PhD - Responsable de la stratégie FX globale

    Vasileios Gkionakis, PhD

    Responsable de la stratégie FX globale
    Kiran Kowshik - Stratège marchés des changes

    Kiran Kowshik

    Stratège marchés des changes
    Homin Lee - Stratège macro senior

    Homin Lee

    Stratège macro senior
    Sophie Chardon - Stratège cross-asset

    Sophie Chardon

    Stratège cross-asset

    Key highlights

    • Global developments appear to be setting off a structural dollar downtrend
    • We have raised our euro-dollar forecast to 1.17 by year-end
    • In line with this upward revision, we have upped our 2020-end euro-Swiss franc target to 1.11
    • We maintain our medium-term sterling-constructive view, but for the near term we think the market has only just begun to price in the “no-deal” Brexit risk
    • The yen remains a solid play; we still target 103 for year-end.

    A number of key macroeconomic developments in the past few weeks have delivered a blow to the dollar and have turned us constructive on euro-dollar again.

    Topping these developments are:

    1. Significant progress on the EU recovery fund
    2. An expansion beyond expectations of the ECB stimulus pandemic programme
    3. A very dovish Fed that now foresees rates at near zero though 2022
    4. Green shoots in the economic landscape which, together with trend improvement in virus infections, set the stage for an economic recovery in H2 20.
    We have turned constructive on euro-dollar

    As a result, the correction of dollar overvaluation, which persisted due to the pricing-in of risk premia, has finally been set in motion.

    We have revised higher our year-end euro-dollar and euro-Swiss franc forecasts to 1.17 and 1.11, respectively. The yen remains a solid play in this environment, able to exploit US dollar downside as well as act as a hedge in case of an adverse scenario. Meanwhile, the market has been somewhat complacent on Brexit risks, and has only just begun to price in the possibility of a “no-deal”.

    In emerging markets, the softer US dollar should allow currencies with relatively lower debt levels and exposure to improving eurozone policy signals to benefit as well as stronger infrastructure spending from China (and potentially the US).

    Given that the GBIEMFX index has exposure to both winners and losers, we have a more neutral view on the benchmark index.

    The main risk is a second virus wave, increasing demand for dollars again

    The main risk to our views is clearly a second virus wave to derail the recovery and increase demand for dollars again. We think recent trends are very encouraging and believe that authorities and the public are better equipped now to contain potential clusters of virus resurgence. Nonetheless, it is impossible to rule out such an adverse scenario.

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