USD: New Phase in the Appreciation Cycle – ANZ
Daniel Been, Senior FX Strategist at ANZ, suggests that the dollar is back as the recalibration of Fed rate hike expectations drove a sharp recovery in US real yields and a broad USD rally has taken hold.
“Despite this, the atmospherics around the current USD rally feel very different from those observed through 2015, and the shift has left us pondering whether we are observing the beginning of a new phase in the USD rally.
Looking back, we think the first phase through 2014 was driven by policy shifts and cheap USD valuation. As such, the USD rallied uniformly. The second phase, in 2015, was characterised by the USD rallying against peripheral currencies, but exchange rates for the big current account surplus counties became far less predictable (as was highlighted by the divergent performances between the EUR and the JPY through May).
There is growing evidence that we are entering a third phase that will be characterised by further differentiation – and as such the USD will become less of a destabilising force on broader markets. If this is correct, USD appreciation will be focused against currencies where valuation remains out of line, or where economic vulnerabilities remain large.
While we are not yet fully committed to this view, the probability of a regime change has become significant enough to flag.”