Curb Your (Dollar) Enthusiasm: For Now - TDS
Ned Rumpeltin, European Head of Currency Strategy at TD Securities, outlines their core G10 FX views for the period ahead.
“After several months of weakness, the USD has traded with a generally better tone since the start of May. However, the process of finding a bottom is not the same as a climb to a fresh top.
The worst may be over for the USD, but it is still likely to remain confined to familiar ranges for some time until a clearer picture emerges on its underlying fundamentals.
For now, we think local factors away from the USD will remain key drivers for overall market direction. Looking across the spectrum of G10 FX, we see a wide array of idiosyncratic factors influencing market behaviour.
Within this, we expect GBP to weaken sharply ahead of the referendum, the EUR to weaken moderately against the USD but see two-way risks elsewhere, and continued firm performance by Scandinavian currencies. We think USDJPY has finally bottomed out for this cycle.
CAD is likely to struggle a bit further against the USD as the domestic macro picture has softened. The AUD and NZD may grind lower as domestic rate expectations begin to offset commodity price improvements.
Looking forward, we think the ambiguity and malaise currently hanging over markets will eventually break in the USD’s favour. For this to happen, however, we will need to see a clear acceleration in the USD’s key drivers. We think the USD will find its sweet spot later this year.
Ultimately, however, we think this process puts the end of the multi-year USD uptrend into view, when taken to its logical conclusion. Given their evolved reaction function, the global environment that allows sustained Fed rate hikes also allows policymakers elsewhere to adopt a more neutral stance and, eventually, contemplate normalizations of their own.”