Back
2 Dec 2015
USD prospects heating up - TDS
FXStreet (Guatemala) - Analysts at TD Securities explained that as winter descends upon the Northern Hemisphere, the USD’s prospects are heating up again as a Fed rate hike looks like a done deal for December.
Key Quotes:
"This, combined with another bout of stimulus from the ECB, is likely to keep the USD fundamentally supported into early next year as market participants remain focussed on divergent growth and monetary policy paths.
That said, however, we maintain our core thesis that FX markets are approaching ‘peak divergence’. From our perspective, the USD rally is near its cyclical maturation point before much more measured performance in 2016.
The market’s fixation with the first rate hike suggests a December move is fully priced for FX purposes, but the very cautious pace to follow is not. Amid peak divergence, the USD looks likely to overshoot.
The Fed’s gradualist approach to policy normalization should provide the USD with a moderate ongoing tailwind, but with other major economies likely to regain their footing in the months ahead, we think the market’s narrative could shift from divergence to the early signs of convergence.
This suggests a less-friendly backdrop for the USD as portfolio inflows may also reverse next year as investors once again seek higher potential (total) returns abroad.
For now, investors should concentrate USD longs against currencies backed by central banks still in active easing mode. This includes the EUR, NOK, and NZD.
More immediately, investors should sell EURUSD ahead of the 3 December ECB meeting, as we have a strong near-term view that spot will head lower into year-end."
Key Quotes:
"This, combined with another bout of stimulus from the ECB, is likely to keep the USD fundamentally supported into early next year as market participants remain focussed on divergent growth and monetary policy paths.
That said, however, we maintain our core thesis that FX markets are approaching ‘peak divergence’. From our perspective, the USD rally is near its cyclical maturation point before much more measured performance in 2016.
The market’s fixation with the first rate hike suggests a December move is fully priced for FX purposes, but the very cautious pace to follow is not. Amid peak divergence, the USD looks likely to overshoot.
The Fed’s gradualist approach to policy normalization should provide the USD with a moderate ongoing tailwind, but with other major economies likely to regain their footing in the months ahead, we think the market’s narrative could shift from divergence to the early signs of convergence.
This suggests a less-friendly backdrop for the USD as portfolio inflows may also reverse next year as investors once again seek higher potential (total) returns abroad.
For now, investors should concentrate USD longs against currencies backed by central banks still in active easing mode. This includes the EUR, NOK, and NZD.
More immediately, investors should sell EURUSD ahead of the 3 December ECB meeting, as we have a strong near-term view that spot will head lower into year-end."