Opening Comment 07.27
At the moment, it seems as currencies can do no wrong, with the USD being sold quite heavily over the past several weeks, despite ongoing concerns over the state of the global economy. The general consensus is that we are in the process of a recovery and although it may take some time, the risks for a double dip recession have gone away, and with this in mind, it appears to be time to once again pour out of the safe haven appeal of the Greenback and into higher yielding currencies with more stable outlooks.
Talk of structural problems within the US have also crept back in, and this theme which had been absent for some time, has certainly weighed on the Buck. While it is certainly true that the European stress tests were conducted with some very loose standards, the fact that the Eurozone banking system is now more transparent has been offset by any drawbacks from a wishy-washy test. As such, it now seems as the only chance for the USD, given the Fed’s commitment to keep monetary policy ultra accommodative for an extended period of time, is for the markets to once again come under some intense pressure on a rapid resurgence in risk aversion.
The safe haven appeal of the buck is therefore the only appeal of the USD and although we are not in favor of this outlook, it looks as though the USD will continue to slide. Before the onset of the global crisis, many analysts were calling for a long-term decline in the Greenback, and any gains resulting from the crisis were deemed to be short-lived. We are now starting to see the proponents of this theory sell the USD more aggressively, with the Euro finding a low by 1.1800 and bouncing sharply since. The commodity bloc currencies have also failed to materially weaken throughout the crisis, while demand for EMFX remains quite strong. Those that have argued in favor of the decoupling theory are now looking good, and as USD bulls, there is certainly reason for concern. Nevertheless, we have not abandoned hope.
Our bullish outlook on the USD is based on a combination of technical and fundamental factors which we would argue could still result in a stronger USD going forward. In our opinion, the US was still the first major economy to suffer at the hands of the downturn within the global economy, and should in turn be the first economy to truly emerge from this mess. While the USD has benefited greatly on its safe haven appeal throughout the crisis, there should be room going forward for the single currency to find solid bids in US economic recovery. Any signs of a sustained recovery will prompt the Federal Reserve to begin to shift its monetary policy, with an aggressive treatment of rate hikes to likely narrow yield differentials substantially back in favor of the buck.
Although we have not seen this play out just yet, we hold onto this view, and will continue to look for opportunities to fade currencies in favor of the buck should the USD continue to decline over the coming weeks. Longer-term technical studies show plenty of room for additional USD gains and this helps to reaffirm our still constructive medium-term USD outlook.
Looking ahead to the European session of trade, German GfK consumer confidence (3.5 expected) is slated for release at 6:00GMT, along with the Swiss UBS consumption indicator. Eurozone M3 (-0.2% expected) and UK CBI distributive trades cap things off for European trade at 10:00GMT.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.