FX Thoughts : The USD Suicide Mission
Has anyone realised that the surest trade off anyone’s head this year is the USD strength trade ?
If you doubt me, just ask around your friends. It is easy. Folks are divided on stocks, bonds, commodities, real estate and gold but for the USD, it is the no brainer trade of the year.
It is so no-brainer that Citibank observed last week that a lot of players had the “right position” on which makes it a crowded trade for both real money and speculative money.
Yet it has not been a one way street for the USD in the early days of 2015, even after last week’s astounding employment numbers.
And for the DXY Index, the weekly chart is starting to show signs of exhaustion.
As we noted in last week’s post, the USD trade is not as easy as it seems as the spec accounts note the over positioning and play around with the daily ranges, casting confusion in the marketplace. https://tradehaven.net/market/fx/fx-thoughts-as-easy-as-saying-penguin/
It is such that even my stock broker has become forex savvy with the temerity to suggest that an newspaper article which he was reading sounded insipid because oil has less to do with currencies than the USD strength.
And he is right because if we run correlations between oil prices and the various currencies out there, the link is quite unapparent as far as numbers are concerned.
Absolutely right.
I personally think what we are seeing is the typical buy on rumour, sell on fact syndrome similar to the rally in China in anticipation of more monetary easing which will likely be followed by a sell-down when the event materialises.
So we could see a USD sell-off post the eventual Fed rate hike or in the event of a delay in the rate hike due to deflationary fears from the collapse in oil prices.
Here’s what DB had to say about the USD a few days ago:
FX: The USD is in the middle of a multi-year upcycle, underpinned by a strong domestic economy and easing abroad
USD has strengthened against all major FX in 2014 and has become a consensus long on account of stronger US growth and likely Fed normalisation
−USD rose ~12% vs EUR and JPY in 2014
We continue to be in the middle of a USD upcycle
−Current up-cycle started in 2011; now mid-cycle
We expect the USD to strengthen further—e.g. EURUSD at 1.15 and USDJPY at 130 by end-2015
−Stronger US growth: especially in relative terms vs. the Eurozone (~2.5% growth rate gap)
−Divergent monetary policy: The Fed will be the first major CB to tighten
Risks to this view include:
−Less capacity for ECB/BoJ to surprise in 2015
−EUR growth surprises on low oil
−EUR resilience of recent years persists
FX: Europe’s current account is leading to a glut of excess savings, which will push the euro below parity by 2017
We expect EURUSD to fall to 0.95 by the end of 2017 as capital outflows rise