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.”
