The USD-losses since mid-February are in sharp contrast with the outperformance of the USD-denominated assets relative to other G10 stock and bond markets. In addition, market measures of inflation expectations are rebounding in the US while they are stagnating in the Eurozone and Japan. Arguably, these developments have a common denominator – the dovish shift in the Fed rhetoric and the apparent détente in the global currency war that have sent the USD into a freefall recently. Ironically, the G20 efforts (coordinated or not) to ease global financial conditions have seemingly benefitted mainly the US so far.
We maintain our long-term bullish USD-view and expect that the unwinding of USD-longs should come to an end before long.Indeed, recent evidence that weak USD boosted the attractiveness of US assets should attract renewed portfolio inflows from global investors starved for yield. We further doubt that the Fed can ignore evidence of accelerating domestic inflation for too long. Last but not least, the “Yellen put” has calmed market nerves but it may not get the global economy growing again. We, therefore, think that G10 commodity currencies should be among most vulnerable if the USD rebounds.
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JPY emerged as the biggest winner of the recent USD-selloff with investors sceptical that the BoJ has the tools to stop it from appreciating further. While we think that an FX intervention is less likely so long as JPY remains undervalued, more easing measures by the BoJ, potentially as soon as 28 April, should mean that the longer-term risks for the currency could still be on the downside.
EUR has lagged behind JPY in the latest rally against the USD, not least because investors seem more confident in calling for further rate cuts from the Governing Council. We believe that the risks for the EUR/USD could be on the downside ahead of the 21 April ECB meeting.
What we’re watching
USD – Next week’s data should pose limited downside risks to the USD.
GBP – Brexit fears should keep the GBP under pressure.
CAD – With the BoC on hold it will be about oil prices to pressure the CAD.
AUD – Next week’s labour data may surprise lower to the detriment of AUD