FX Convictions – Still gotta be the dollar

by: Georgette Boele , Roy Teo

150205-FX-Convictions.pdf ()

Our current high conviction views

Despite the strong dollar rally, we remain convinced that the dollar will continue its rise. We therefore stick to long US dollar versus the euro, the yen, the sterling and the Australian dollar as our top pick conviction calls. Interest rate markets have so far been reluctant to fully price in the rate path that is being signalled by the Fed. We expect higher rates than financial market currently anticipate. If markets start to catch up to the likely extent of rate rises this year, the US dollar will likely appreciate further.

In addition, we remain negative on the euro despite the drop since May 2014. This trend is supported by the ECB’s aggressive QE program. We expect euro weakness as long as this QE program remains in place. Monetary policy divergence across the Atlantic will remain a major theme for the euro versus the US dollar.

Moreover, it is likely that weakness in Japanese yen has further to go. This is because USD/JPY is very sensitive to developments in the interest rate spread between both economies. While US short-term interest rates will go higher, we expect the BoJ to step up its monetary easing program later this year.

Last but not least, we expect the sterling to underperform because of political uncertainty ahead of the May elections and the prospect that the US Federal Reserve will start hiking earlier than the Bank of England.

Changes in our high conviction views

Since our latest report end of October we closed our long USD/CHF (31 October 2014), long CNH/YEN (10 November 2014) and long MXN/EUR (12 December 2014) positions. Meanwhile, we have opened a short GBP/USD (28 November 2014) position. These changes were communicated in our higher frequency publications.