“We continue to look for a stronger USD, a view which we have held over the last six months,” HSBC analysts say and list their responses to the five main bearish arguments listed below.
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Fed rates are near the peak and are already priced in: Rates may be moving closer to neutral, but this is not the same as the peak rate. Doubts remain about when and how quickly other central banks will raise rates. Also, the level may matter, not just the rate of change.
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The US economy is set to slow, while Eurozone growth will pick up: US growth estimates are being revised upwards, while the Eurozone needs growth to recover just to meet existing forecasts. Survey data in Eurozone remains challenging. The market seems to assume a Eurozone recovery but cannot explain the big growth miss so far in 2018.
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Structural forces point to a weaker USD, overwhelming any cyclical support from higher interest rates: Eurozone has its structural frailties too, as Italy’s tribulations illustrate. Internal Eurozone imbalances are difficult to address. Fiscal issues can open the question of whether the EUR is divisible, while the USD is not.
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Emerging markets FX is structurally sound and cheap, with USD weakness the flipside: We believe emerging market FX does not offer value and those that are ‘cheap’ reflect their risk profile. Foreigners still own much of the local market, suggesting less scope for a rush back into these currencies. Macro frailties remain.
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The USD has not rallied enough or at all given what should have been supportive developments – this shows it is already expensive: The USD has continued to rally on a broader basis, even if this is not fully captured by the USD Index (DXY). The USD is not expensive on our metrics, and has room to catch up with these developments, in our view.
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