“While we have been USD bulls for some months, we would still argue that the greenback does not have a straightforward association with the status of safe haven,” say Rabobank analysts.
Key quotes
“The sheer liquidity associated with the USD means that for some investors the USD will always be a safe haven, though in theory the US’s twin budget and current account deficits sour this status. There are a few small countries with good budget and current account positions such as Denmark or Norway. However, a lack of liquidity means that these could never perform a true safe haven function. The JPY and the CHF are the traditional safe haven currencies. Both have current account surpluses, even though Japan runs a budget deficit.”
“In view of the risks of being burnt by SNB FX intervention, we expect that the JPY is probably the safe haven currency of choice of many investors. That said, since February the USD has narrowly outperformed the JPY. We attribute this to changing interest rate differentials. At the start of the year, there was talk in the market that following strong Japanese economic growth in 2017, the BoJ could start to back away from its extremely dovish policy settings this year. The BoJ pushed against this speculation. On the back of a bout of disappointing Japanese economic data, this was accepted by the consensus during the spring and the value of the JPY duly dropped back.”
“We are forecasting the USD to hold around current levels in the coming months vs. both the JPY and the CHF. However, we continue to expect capital inflows into the USD from a number of EM currencies in the months ahead. We also see potential for further USD outperformance vs. the EUR based on a dovish ECB and the expectations of strains within the EU on immigration and within the EMU stemming from budgetary concerns. We are targeting EUR/USD1.12 on a 12 mth view.”
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