USD Weakness has Likely Overshot in the Near-term – MUFG

USD Weakness has Likely Overshot in the Near-term – MUFG

4 May 2016, 13:11
Roberto Jacobs

USD Weakness has Likely Overshot in the Near-term – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to rebound in the Asian trading after the dollar index hit its lowest level yesterday since January of last year.

Key Quotes

“The rebound for the US dollar has been most evident against commodity and emerging market currencies. US dollar weakness appeared to be overshooting relative to short-term fundamental drivers likely encouraged by the break of key technical levels. From this perspective it is not surprising that we have seen some reversal of recent US dollar weakness which was becoming excessive in our view although there is not a clear fundamental trigger for the reversal.

Bloomberg has cited more hawkish comments from Fed members as offering support for a stronger US dollar although it does not appear consistent with the sharp decline in US yields yesterday.

The Fed is continuing to draw comfort from the resilience of the US labour market whose performance is diverging with weaker economic activity. The release today of the latest ADP survey for April will be watched closely to assess if that continues to remain the case. The early timing of Easter could pose some downside risk for today’s ADP survey reading. A further modest improvement is expected as well in the in the latest non-manufacturing survey for April although it is expected to remain at levels more consistent with moderate economic growth.

Another explanation for the rebound in the US dollar is the potential for a rebuilding of monetary easing expectations outside of the US reinforced by the RBA’s decision to lower rates further yesterday. Broad-based US dollar weakness is creating more scope for overseas central banks to ease policy to support growth if required and pressuring others to respond with further easing to defend the credibility of their inflation targets including the BoJ although it failed to deliver at its most recent meeting. Further easing outside of the US would help to dampen some of the downward pressure the US dollar has been under so far this year as the Fed has signalled a more cautious outlook for further monetary tightening.

A more sinister potential explanation that would fit better with renewed weakness in commodity prices which was also evident yesterday would be if the US dollar is beginning to transition out of the sweet spot for weakness. The US dollar could begin to strengthen especially against commodity related and emerging market currencies if concerns over global growth concerns were to intensify again. A dampening of current optimism over the policy stimulus boost to economic growth in China could provide one potential trigger.

Overall, we still believe that it is too early to confidently predict that the tide has now turned for the US dollar which is more likely to remain on the defensive in the near-term. However, we do believe that after the sharp adjustment lower so far this year the risks are becoming more balanced limiting the scope for further weakness.”


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