Search ForexCrunch

The USD has taken a beating over the summer but arguments for further USD weakness remain intact. The persistent twin deficits in the US could weigh on the the greenback if world trade rebounds further and global yield curves steepen. Economists at Nordea see a clear risk of EUR/USD trading above 1.25. In fact, 2021 forecast is at 1.26.

Key quotes

“A widening budget deficit paired with a continued trade deficit is an issue for the USD – but mostly when the rest of the world catches up growth-wise, as has been the case since the reopening of the global economy during Q2. Why should foreigners accept to fund persistent twin deficits if the USD level is already very strong? This question is particularly relevant when tail risks abate elsewhere.”

“The scope for a weaker USD is clearly intact and there is even a risk of a pretty large move in a weaker direction. The below correlation between the trade-weighted USD and the budget balance adjusted for the unemployment gap suggests that the USD could weaken by as much as 20-25% over the coming two years. We fully buy into this direction but the ECB will likely try to ‘fight gravity’ with verbal intervention to prevent the pair from moving above 1.20 for a while before allowing it to run its course into 2021. We aim for (at least) >1.25 levels in EUR/USD.”

“The USD will likely weaken over the next 12-18 months against most, if not all, major peers, with the biggest question mark surrounding the EM currencies. The GBP has also rallied against the USD but remains weak versus the EUR. We see little scope for GBP weakness versus the EUR (and the Scandies) as e.g. EUR/GBP remains sensitive to the Brexit negotiations. As long as no clear exit route is outlined, we would argue that EUR/GBP should be above 0.90 and maybe even a tad higher than that before New Year. We would argue that the scope for a stronger GBP is pretty substantial, should a managed exit finally take place but a lot of noise will be seen between now and then.”