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US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

Justin McQueen, Strategist

USDFUNDAMENTAL HIGHLIGHTS:

  • Month-End Flows Post Short-Term USD Downside Risks
  • Vol Suppression Sees USD Lower
  • US Facing Multi-Year Trendline
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Month-End Flows Post Short-Term USD Downside Risks

A liquidity thinned week has had the USD on the backfoot with the greenback now below 92.00. Month-end flows are likely to dictate price action in the USD on November 30th as it had done at the back-end of last week. Several investment bank models have been touting above average USD selling for month-end rebalancing given the outperformance in US equities this month. The S&P 500 has had the strongest month since April with gains of over 11%.

S&P 500 Posts Strongest Performance Since April

US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

Source: Refinitv

The chart below shows the price action in the greenback in the run-up to the London 4pm fix back in April. To that end, short-term risks in the USD are tilted to the downside. However, I would also be mindful that volatility tends to pick up around the fix and can often see a reversal in price action right after the 4pm fix.

US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

Source: Refinitiv

Vol Suppression Can See Lower USD For Longer

Aside from month-end, vol suppression persists with the VIX briefly dipping below 20.00. This will be key as to whether we see a continuation in the move lower in the greenback. While the post-election and post-vaccine updates have seen vols maintain a steady move lower, both the EU and UK are facing key risk events in the near-term with trade talks yet to yield a post-Brexit trade deal. Alongside this, the EU also face a delay to the Recovery Fund implementation with both Hungary and Poland putting a halt to progress over. As such, with markets remaining heavily short the USD, the Euros challenge of the 1.20 handle could be short-lived.

VIX vs USD Chart

US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

Source: Refinitiv

US Facing Multi-Year Trendline

US Dollar Forecast: USD Faces Immediate Downside Risks on Month-End Flows

Source: Refinitiv

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