This is no news that the US dollar has had a tough year so far but the question is whether further USD weakness is sustainable. On a trade weighted basis, the greenback fell more than 8.5% since the beginning of the year. The sharp appreciation of the single currency is responsible for most of move as it rose more than 12.60% against the USD, followed by the Swedish krona and the Australian dollar, up 12.25% and 9.90% respectively.
Nevertheless, since the beginning of the week, it seems that downside pressures on the USD are fading away as market participants reassess the dollar outlook. Given the rapid pace and the scale of the greenback debasement, we think it is time to consider the possibility of a bounce back. Not because the US fundamentals have changed drastically recently - even though yesterday dovish comments from Mester and Williams do not support my point - but because the market has a strong bearish bias. It is true that the latest US economic data does not allow for excess optimism; however the situation abroad is not much brighter.
More specifically, there are some interest opportunities, especially in the commodity currency complex. Both the Aussie and the Kiwi have benefited from the flight to higher yielding currencies as investors discounted the Fed’s hawkish bias. In addition, recently released economic data suggests that both of those countries are suffering from temporary setbacks, meaning that a downward adjustment of their respective currency is more than likely.
By Arnaud Masset