Podcast : After the Dollar weakness, What Do We Think Now?
We became constructive on currencies vs. the dollar as highlighted in our 2022 mid-year outlook last year, as historically the dollar normally peaks 6 months after the Federal Reserve starts hiking. On schedule, the dollar peaked in September 2022, on peak Fed hawkishness and yields. As a result, we also became constructive on the dollar treasury and investment grade bonds in October, and eventually non-US equities.
Since then the dollar has weakened by 10% since its peak in September after the largest dollar rally in two decades. It also has weakened year-to-date by -2.8%.
What do we think now?. For most currency pairs we aren’t further lowering our dollar forecasts. Hence, in the short-term a period of consolidation may occur given many pairs have hit our targets vs. the dollar.
¡ The resilience of the US economy appears to arrive at an end. Weakening growth expectations, combined with peak Fed hawkishness and peak yields, have weighed on the dollar.
¡ The mild winter in the Eurozone and the falling energy prices are reducing the uncertainties about the energy crisis. The European stocks are benefiting from this renewed confidence and is a strong supportive factor for the EUR. Hence, the currency outperformed.
¡ The AUD and NZD have been buoyed by the good news from China. We think those news is now starting to get priced in and expect a stabilization of the currencies around the current levels.
¡ The EURCHF is at parity. The pair rose in the light of improved optimism for the Eurozone. The Swiss franc remains supported by strong fundamentals. The safe haven currency is expected to appreciated slightly in the coming months.
¡ In Japan, the central bank changed its policy in December but kept it unchanged in January. However, we see potential for further adjustments coming from the Bank of Japan during the year.
¡ We have a bullish stance on the CNY in medium term after the rally. The reopening of China and the government’s supportive measures should strengthen the Chinese currency.
In short, expect some consolidation after the weakness in the dollar. Could we see a moderate counter-trend Dollar rally? This week’s FOMC meeting could move to 25 bps increments however, the Chair Powell’s tone on how hawkish or dovish given poorer economic figures but loosening financial conditions and low unemployment will be interesting to see. Trading opportunities could arise.