Forex
Time has come to buy dollar, BCA says, ahead of Fed rate-cutting cycle
Investing.com — The snapped its four-week losing streak on Friday, and some believe the time has come to buy the greenback as this fighting spirit is set to continue.
“We have been recommending a trading range in the DXY between the 101 and 108 level. The DXY recently hit our buy zone, and we suggest it is time for investors to be long,” BCA Research said in a recent note.
The bullish outlook on the dollar has history, or rate-cut cycle history on its side, BCA notes, adding that the ebbs and flows in the FX market during a rate cutting cycle is fairly consistent.
The dollar has tended to be flat-to-down in most cycles leading to the first rate cut by the Federal Reserve. But the dollar is now already at its lowest point compared to previous cycles, assuming the Federal Reserve begins interest-rate cuts in September, suggesting the room for significant downside could be limited.
“The median rally in the DXY over the ensuing 12 months after the Fed eases policy is 5%,” BCA added.
In prior cutting cycles, the Fed has cut interest rates by close to 400 basis points on average over the 12 months following the start of an easing cycle. This time, however, the market is pricing in Fed rate cuts of about 200 basis points, or half of the historical average.
“If our thesis is correct and the Fed does not cut rates by more than what is already priced in markets, this bodes well for the dollar,” BCA said.
The divergence in monetary policy expectations between the U.S. and other major economies is also expected to support the dollar.
“Our work (on the sensitivity of GDP to interest rates) suggests that policy is already very restrictive for the UK and the Euro Area. These economies are thus likely to witness a deeper recession relative to the US,” BCA said.
But not everyone is convinced that the dollar’s recent strength marks the start of a prolonged rally.
Sentiment toward the dollar is already bullish, BCA says, as “most investors are already long the dollar,” running the risk of a catalyst forcing potential leveraged liquidation in long-dollar positions.
“This catalyst will come in the form of higher stock prices, lower bond yields and low volatility,” BCA said, flagging a volatility as a key measure to watch given its close correlation with the dollar.
“Among the measures we care about the most, we will be tracking trends in volatility,” it added.
UBS advised investors to sell any potential short-term gains in the US dollar, adopting a more bearish stance on the currency for the medium term. The firm anticipates a possible corrective rebound in September, particularly if the Federal Reserve’s hesitancy to implement rate cuts greater than 25 basis points aligns with the seasonal trend of the US dollar outperforming during this month.
The current market positioning data indicates that the fast money shorts against the dollar are predominantly in the Euro (EUR) and British Pound (GBP), with both currencies potentially vulnerable in the near term. However, UBS views the GBP as a buy on dips, citing a more supportive domestic rates outlook and historical patterns of a strong recovery in sterling from late October to early November.
In contrast, the Japanese Yen (JPY) positioning is relatively neutral, suggesting the unwinding of short-term yen-funded carry trades. The Yen is also gaining from the return of its inverse correlation with equities, which has elevated it to one of the top performers in the G10 currencies.
Moreover, the Swiss Franc (CHF) has performed well and, without significant intervention from the Swiss National Bank (SNB), is expected to remain supported as residual franc shorts are covered. UBS has set a target for at 0.93.
The firm’s updated cross-border mergers and acquisitions tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but positive for the GBP and JPY. For Australia, the tracker indicates a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, which has reached a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, which is helping to offset a widening current account deficit.
UBS notes that Australian goods export volumes have remained stable, suggesting that the worsening trade balance is due to falling commodity export prices and rising import volumes. However, they believe the impact on the AUD may be limited as the currency did not significantly appreciate during the post-Covid commodity price surge, and the increase in imports may reflect strong domestic demand, which is why UBS maintains a constructive outlook on the AUD.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
BCA Research provided insights into the anticipated monetary policy actions by central banks in China and the United States. The research firm expects Chinese authorities to lower interest rates on existing mortgage loans, while the Federal Reserve is predicted to begin its monetary easing cycle.
According to BCA Research, a potential 100-basis-point cut in Chinese mortgage rates could save homeowners in China approximately RMB 300 billion ($44.7 billion) annually on interest payments.
Despite these potential savings, BCA Research suggests that the impact on China’s broader economy would be limited. The firm points out that subdued consumption is likely to persist due to factors such as weak labor market prospects, slower income growth, and household reluctance to take on new debt.
BCA Research also commented on the recent appreciation of the (RMB), deeming it unsustainable over the next six months. The firm believes that even with the Federal Reserve’s easing, the U.S. economy is not likely to be steered away from a recession. In this context, BCA Research views the U.S. dollar as a counter-cyclical currency that is expected to rebound.
Looking ahead, BCA Research anticipates that a U.S. recession could evolve into a global trade contraction by early 2025. The firm points to China’s economic vulnerability to such a downturn, which could negatively affect the value of the RMB.
Moreover, BCA Research forecasts that China will continue to experience disinflationary or deflationary pressures, necessitating the central bank to keep policy rates low. This environment of low interest rates coupled with modest growth is anticipated to restrain any significant appreciation of the Chinese yuan against the U.S. dollar.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com– Most Asian currencies gained ground on Wednesday as the dollar retreated in the wake of a fiery U.S. presidential debate, with focus turning to key upcoming inflation data due later in the day.
The Japanese yen was among the biggest beneficiaries of this trade, with increased safe haven demand after the debate putting the yen at its strongest level since early-January. The yen also benefited from somewhat hawkish-leaning comments from Bank of Japan officials.
Broader Asian currencies advanced on Wednesday, seeing some relief from a softer dollar. But regional markets were still nursing steep losses over the past week amid waning risk appetite.
Dollar dips after presidential debate; CPI awaited
The and both fell about 0.2% in Asian trade, with losses in the greenback coming in the wake of a fiery presidential debate between Kamala Harris and Donald Trump.
The debate furthered expectations for a hotly contested 2024 presidential race, which could present a major point of uncertainty for markets, given the contrasting views on policy pushed by both candidates. Harris and Trump both veered from the presented topics to engage in personal attacks against each other.
The dollar was also on the backfoot ahead of key inflation data due later in the day, which is widely expected to provide more cues on interest rates.
The reading comes just a week before a , where investors expect the central bank to cut rates by at least 25 basis points.
Japanese yen at 8-mth high on safe haven demand, BOJ hawkspeak
The yen was the best performer in Asia, with the pair falling 0.8% to 141.38 yen- its lowest level since early-January.
The currency benefited from some safe haven plays, as uncertainty over the U.S. election ramped up after Tuesday’s debate.
But a main point of support for the yen was hawkish comments from BOJ member Junko Nakagawa, who said that the central bank will continue to raise interest rates if inflation moves in line with its forecast.
Nakagawa’s comments come following a slew of hawkish signals from the BOJ, and were also made just a week before a BOJ meeting. Investors are uncertain over another rate hike by the central bank, following a 15 basis point raise in late-July.
Broader Asian currencies advanced, albeit slightly, as focus turned to the upcoming U.S. CPI reading.
The Chinese yuan’s pair fell 0.1%, but the yuan remained on the backfoot as U.S. policymakers proposed several more trade restrictions against Beijing.
The South Korean won’s pair fell 0.3%, while the Singapore dollar’s pair shed 0.2%.
The Indian rupee’s pair steadied near 84 rupees, while the Australian dollar’s pair was flat after sliding from over nine-month highs over the past week.
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