USD: Is the Currency Oversold? - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the futures are
implying a stronger risk of a US rate hike this year on the back of
yesterday’s slew of hawkish commentary from Fed officials.
“Not for the first time the prospects of two or even three Fed rate hikes was mentioned by FOMC members, though neither Kaplan, Lockhart nor Williams are currently voting members of the committee. In tune with the move in the futures market the USD index has extended its May recovery and it now trading at its best levels in around 3 ½ weeks. That said, while the market ascribed probability of a June or July rate hike has increased, it remains low. This suggests that a summer policy move from the Fed would likely trigger a brutal reaction in the USD.
While the Fed may have adopted a very cautious position with respect to policy tightening, we concur with the sentiments of many Fed officials that the market could be significantly under-pricing the risks of a policy tightening from the Fed this year. Even for those who predict little risk of a Fed move this year, a long USD position could look now attractive since the Fed is still the only G10 central bank that could raise rates in 2016. Indeed, further loosening in policy is possible from most of the rest of the G10 this year and this increases the relative attraction of the USD at a time when the overall size of long positions are low.
While we expect a fall in EUR/USD to exert upside influence on the USD index this year, we also see scope for the broad-based value of the USD to continue benefitting from continued outflows from China. Softer than expected releases of the latest Chinese production, retail sales and investment data combined with last week’s report in the People’s Daily predicting an ‘L’-shaped recovery provide good reason to expect the USD to outperform the CNY.
Despite the US Treasury’s attempts to push back against currency war this year and an upward push in the USD, we see the USD as likely being a point of least resistant for currency flows in the coming months. For USD/JPY we see scope for moderate gains, though any sniff of crisis in China would likely lead to a sharp rally in the value of the JPY. For EUR/USD we are forecasting a move to 1.10 on a 3 mth view and 1.08 around year-end.”