FX Convictions – Dollar regaining momentum

by: Georgette Boele , Roy Teo

150310-FX-Convictions.pdf ()

Our current high conviction views

Despite the strong dollar rally, we remain convinced that the dollar’s upswing has a long way to go. 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 policy rates than financial markets 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 US and Japanese 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.