USD to remain well supported - Rabobank

Jane Foley, senior FX strategist at Rabobank, suggests that across the board strength of equity indices in the year to date paints a clear picture as investment decisions will continue to be buffeted by fear of a growth slowdown and worsened fundamentals in the world’s most important economic regions and against this backdrop, they are expecting the USD to remain well supported in the months ahead.

Key Quotes

“It is our view that the US economy is at risk of slipping into technical recession in the latter half of 2020.  This implies that we are preparing for a set of data disappointments from the US in the months ahead.  Despite this view, we expect the USD to remain reasonably firm.”

“USD has been performing a safe haven function such that a strong decline in risk appetite which triggers a dis-investment from emerging markets benefits the USD.  Although it can be argued that the USD credentials as a safe haven are blighted by the US’s current account and budget deficits, the greenback has liquidity on its side.  It remains the global reserve currency and an increasing number of foreign currency debt has been issued in USD in recent years which equates to the potential for increased demand.  For many practical reasons the USD serves the purpose of safe haven currency very well for a large number of investors around the globe and these reasons are likely to be given a boost by the relatively attractive yield on offer compared with the traditional safe havens which are the JPY and the CHF.”

“In the coming weeks there is the possibility that risk appetite will be lifted if the US and China manage to stage a signing ceremony signalling a compromise in their trade war.  In the first instance relief could lift demand for risky assets and depress the value of the USD.”

“In addition to US/China tension, concerns about slowing growth in the Eurozone and the possibility of more policy accommodative from ECB is also a USD positive factor. With the exception of the Norges Bank, the market’s expectations for all G10 central banks has turned more dovish this year and this also shines a relative positive light on the USD.  On a 6 month view we see scope for a move towards EUR/USD1.10.”