US DOLLAR FORECAST: NEUTRAL
- US Dollar[1] gains on pro-risk currencies as risk aversion sweeps markets
- Parallel USD[2] decline vs JPY[3], EUR[4], CHF[5], GBP[6] echoes Fed rate cut bets
- Presidential election, payrolls data, ISM and PMI surveys next in focus
The US Dollar produced mixed results against its major counterparts last week. Capitulation in market-wide risk appetite provided a backdrop for the Greenback to rally against cycle- and sentiment-sensitive currencies while falling against the Euro, Swiss Franc, Japanese Yen and British Pound.
At surface level, the markets were said to be shuddering amid growing concerns about the economic impact of the Wuhan coronavirus outbreak. An underlying push toward de-risking[7] seemed to be at work however, as the selloff tellingly continued even after news-flow appeared to brighten a bit.
US DOLLAR PRICE ACTION REFLECTS ROOM FOR FED RATE CUTS
This bifurcated performance seems to split the difference between USD’s appeal as a haven of ultimate liquidity and its vulnerability to further monetary easing. The Dollar commands an average yield premium of about 140 basis points against the Euro, Pound and Yen. That offers room for compression.
Market turmoil has translated into repricing of Fed policy bets. The markets are now convinced that at least one rate cut is on tap before the end of the year. The perceived likelihood of a second cut has also swelled to near-certainty. The rolling 12-month outlook is at its most dovish since early October.
US PRESIDENTIAL ELECTION, JOBS DATA, ISM AND PMI SURVEYS IN FOCUS
The US presidential election will heat up in the week ahead as the Iowa caucuses kick off the Democratic Party primary and President Donald Trump delivers the annual
