According to analysts at Westpac, it has been a year of strength for the US dollar due to the US economy’s outperformance and as global uncertainties have kept investors ‘risk averse’ and these factors will remain active ahead, but their significance will diminish.
Key Quotes
“We believe the US dollar will lose altitude through 2020 and 2021.”
“To start, we need to emphasise that the US dollar (DXY) peak for this cycle has likely already been seen – circa 99.4 at the end of September. Since then the US data has been patchy and the FOMC has cut at a third consecutive meeting (in October). However, the prime driver behind the US dollar’s 2.3% depreciation to 97.1 arguably has instead been the market’s belief that global uncertainties, particularly US-China trade relations, are in retreat.”
“Supporting this view: both developed and emerging market equities have continued to rally over the past three months; bond yields have edged upwards; and VIX volatility has repeatedly edged down to new historic lows. On the outlook for uncertainties, our base view is for little net change. This will increase the prominence of relative economic growth and policy rate differentials in the minds of market participants as they trade.”
“Behind the forecast decline in DXY to 96.3 end-2020 and 94.9 end-2021 is an expected strengthening in the Euro, from a low of USD1.09 at March 2020 to USD1.12 in late-2020 and USD1.15 in the second half of 2021. Arguing for this view is an expected pick-up in Euro Area year-average growth to near trend in 2021 (back to 1.2% from 1.0% in 2020) and a further tightening of their labour market – aiding inflation expectations if not inflation itself.”
“Also supportive of the Euro over the period is a belief that the ECB will only cut the deposit rate by 10bps in March 2020. This is in contrast to 75bps of easing by the FOMC through 2020.”
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