FX Convictions – Close long USD versus EUR

by: Georgette Boele , Roy Teo

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  • We think that the US dollar rally is behind us
  • Therefore we close our long USD versus EUR
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US dollar rally behind us and we close USD long versus EUR

We have changed our forecasts for the dollar against the euro. Although there could be some temporary waves of positive US dollar sentiment, we think that  it is unlikely that we will see another strong US dollar rally from here on. In fact, we think that the dollar rally is behind us. This is because the real yield support is fading and politics is uncertain on both sides of the Atlantic. Most of the positive news – in terms of the US economy and upcoming Fed rate hikes – is already reflected in the price in our view and investors are already positioned for dollar strength. The absence of a dollar rally will result in investor position liquidation.  Our new Q2 and Q3 2017 EUR/USD forecasts are 1.05 (our previous forecast was 0.95). Once ECB tapering expectations start to build in Q4 2017, we expect EUR/USD to rise towards 1.10 which is our new year-end 2017 forecast (previously: 1.00). For 2018 we continue to expect the US dollar to weaken across the board and to start its downturn. By then the positives for the US economy and the Fed rate hikes will be fully anticipated and central banks in other countries will probably stop easing and move towards a less accommodative monetary policy. Our new year-end 2018 forecast for EUR/USD is 1.20 (previously 1.10).  For more, please see FX Watch – Dollar rally behind us. As a result we close our long USD versus EUR. The total return on the EUR/USD short is 0.7%. Next week we will look at our other FX forecasts and we will come with an update on the long USD/JPY and USD/SGD position.