Forex
Dollar has further upside against G10 currencies – UBS
Investing.com – Aggressive movements in the Japanese yen this week, largely versus the U.S. dollar, have prompted talk of official intervention. While this could be seen as a sign of extreme dollar strength, UBS pointed to yen weakness, saying the dollar offers more upside on a broader scale.
“The past week has been a consequential one for ,” said analysts at UBS, in a note dated May 1, as the Bank of Japan stuck to a dovish tone at its meeting, resulting in USDJPY climbing above 160 on Monday, “and spurring what markets believe was FX intervention.”
“What we see as extreme JPY weakness has in some cases been conflated with excessive USD strength. We disagree with that framework and think the USD has more upside against G10 more broadly, even if it’s hard to call it ‘cheap’,” UBS added.
The bank noted that there has been some talk of concerted action in the foreign exchange markets of a similar nature to the Plaza and Louvre accords of the 1980s.
However, “we find that the context was markedly different and see high hurdles to a similar round of joint actions to weaken the greenback this time round,” the bank said.
“A major shift in U.S. attitudes would be necessary as a starting point, alongside a deterioration in the trade deficit that starts to take on the hue of what’s already been seen in the fiscal deficit. That is absent for now.”
The broad U.S. dollar is well below 2022 levels, UBS said, and far from extremes.
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“It still has more to give.”
UBS continues to hold long positions against the G10 currencies, the Canadian dollar and Swiss franc.
On the Swiss franc, “we note that there were some signs that the SNB [Swiss National Bank] may have bought forex in March, which if proved correct would further underpin our long-standing bearishness on the currency,” UBS added.
Investing.com – Markets appear to have bought into the “soft landing” narrative after the Federal Reserve’s hefty interest rate cut, but Bank of America Securities remains a seller of the US dollar for now as the US central bank has room to go lower.
Following the Fed’s 50bp cut, front end rates (the main driver of foreign exchange moves) reflect expected Fed easing magnitudes on par with significant past downturns, BoA Securities said, in a note, dated Sept. 26.
Meanwhile, risk-asset performance has been more consistent with a “soft landing” and reflation: Higher-beta FX outperforming lower-beta, equities and gold higher, credit tighter, and longer-end UST curve bear steepening.
A soft landing is still the bank’s base case, and it continues to foresee broad USD depreciation. But hard landing risks appear to be underpriced, and “we must be mindful of risks in these uncertain times.”
Large rate shocks (in either direction) tend to be dollar positive, but the nature of the move matters.
“With the ‘soft landing’ narrative well priced, any negative headline shocks may indeed lead to brief risk-off USD retracements. Still, we believe the USD is in a “sell-the-rally” regime for now.”
Investing.com – The Federal Reserve has started its rate-cutting cycle, and Bank of America Securities continues to expect modest US dollar downside going into 2025.
“Although the Fed modestly surprised markets with a 50 bps cut last week, we see core FX dynamics largely unchanged in G10, with continuing to drift higher,” analysts at Bank of America Securities said, in a note dated Sept. 26.
The bank sees the US dollar as moderately overvalued, but the Fed rate cutting cycle would likely help further attenuate this overvaluation over the medium term, including our outlook for a rising EUR/USD.
“We look for EUR/USD to build on recent gains, with our unrevised forecast profile of end-2024 at 1.12 and end-2025 at 1.17,” BoA said.
USD downside is more likely to continue, the bank said, as disinflationary trends and a softening labor market support the Fed in a modestly more accelerated rate-cutting pace.
BoA expects another 50 bps cut at their November meeting and a 25 bps reduction in December.
At 10:00 ET (14:00 GMT), EUR/USD traded 0.1% higher at 1.1142, up around 1% year-to-date.
Investing.com — Citi has updated its forecast for the , providing insights into the pair’s trajectory for both the medium-term and long-term.
The bank’s strategists highlight that the recent depreciation of the yen is driven largely by a retrospective narrative tied to Japan’s digital account deficit. However, they suggest that this narrative of structural yen weakness is a “fallacy,” with the currency’s current status being more nuanced.
In its medium-term base case forecast, Citi suggests the yen could weaken, potentially driving the USD/JPY towards 150 by the end of 2024.
However, looking further ahead, strategists caution the pair could dip below 140 in early 2025, continuing its downward path to close near 130 by the end of next year.
In explaining this forecast, Citi points out that various factors could reverse the recent yen weakness.
Among these is the potential repatriation of foreign earnings by Japanese corporations, which could provide upward pressure on the yen. Moreover, the travel surplus and increasing royalties on intellectual property are improving Japan’s current account balance, which might further support the currency’s strength over time.
Citi also challenges the prevalent view that Japan’s digital account deficit reflects a long-term structural weakness.
“In our view, this is essentially a trend-following argument that seeks a retrospective narrative of the JPY depreciation that has continued for the past ten years,” Citi strategists noted.
“It is based on a distorted story of the actual picture of Japan’s BoP, and the rectification of this distortion could take several years. During this period short JPY positions held by a range of economic entities will remain, and there should be steady market forces that work to overturn these positions.”
Still, Citi remains cautious about the yen’s near-term outlook. The bank acknowledges that significant factors, such as portfolio investments and the broader financial balance, will continue to influence USD/JPY fluctuations.
They also warn that the pair remains sensitive to marginal changes in market conditions and flows.
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