Andreas Steno Larsen and Martin Enlund, analysts at Nordea explained that the main culprit of the re-strengthening of the USD is still the shrinking excess USD liquidity and the trigger is that year-end has now entered the 3-month time frame.
Key Quotes:
“Judged by excess liquidity developments, the DXY index should peak before new-year, with or without a debt ceiling stand-off early next year.”
“In a debt-ceiling stand-off scenario the USD could weaken rather sharply in the period from December to March, but the peak is probably not yet in, in broader USD-terms, as liquidity momentum speaks in favour of the USD a few months still (even without considering the year-end effects on excess USD liquidity).”
“The turning tide (before new-year) in the USD excess liquidity development year over year is though not the only reason, why we think that the EUR vs. USD barometer will turn ice-cold for the Dollar ahead of new-year.”
“The core inflation spread between US and the Euro area has been an important factor behind the re-strengthening of the USD this year. Even despite Friday’s new core inflation miss in the Euro area, we judge that the core inflation spread will become a EUR-positive in momentum terms rather soon.”
“EUR core inflation simply looks too low compared to most indicators so maybe this is the exact right timing to bet on higher EUR-inflation, given the disappointment after Friday’s core inflation miss?”
“We like to buy into any dip below 1.1550 in EUR/USD.”
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