USD: Change of mood - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, in the past few months, sentiment has been moving in favour of the USD and it is their expectation that the more constructive mood with respect to the greenback has further to run.

Key Quotes

“Broadly speaking investment conditions in 2017 were lifted by both cheap money and strong world growth.”

“Even though the Fed continued to hike interest rates, the level of risk appetite was sufficiently great to absorb the impact of progressively tighter monetary conditions in the US and the hunt for yield continued.  This year, however, the risk appetite has soured.  Illustrating this, the USD has outperformed the majority of currencies in the Latam, Eastern European and Asian space for the past 3 months or so.”

“Several multinational companies have already pointed to the risks to their business from a global trade war. Uncertainty about potential tariffs, associated costs and the potential for a fall in consumer demand on the back of higher prices have all been cited as risks by a range of firms.  Assuming this has translated into postponed investment decisions, it is possible that fear of trade wars has already had an impact on global growth.”

“The Fed’s position remains unchanged and far more hawkish.  The Fed’s dot plot suggests that there will be a total of 3 rate hikes this year.  The market is spilt on whether there will be 3 or 4.  This is positive for the outlook of the USD against a host of other currencies.  Although interest rate differentials failed to draw the greenback last year, this was in part due to the market’s determination to move into higher yielding assets and part due to the rotation back into the EUR. This year’s deterioration of risk appetite should support the USD vs. a wide range of currencies while disappointing economic data in the Eurozone has reignited the appeal of the greenback vs. the EUR.”

“In the short-term the market will be hoping that today’s US PPI inflation release and tomorrow’s CPI data will throw more light on how much tightening could be announced by the Fed this year.  That said, there would appear little risk that the Fed will be outpaced by any other major central bank this year.  Although our USD forecasts have been more bullish than those of the market for a range of currency pairs, we see risk that we will be revising up our expectations for the USD in the coming weeks.”