USD: Still bullish? - Rabobank

The DXY dollar index may have pulled back a little ground over the past couple of sessions, but it is still trading noticeably below its August high, points out Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“The week ahead has the potential to provide fresh support for the greenback in part due to the publication of key US data, including the August labour report, but also due to the continued turmoil in emerging markets.”

“Even though Friday’s job report is expected to show that wage pressures remain relatively contained, the tightness of the US labour market is likely to be sufficient to cement market expectations for another Fed hike later this month.”

“The market also faces releases of other key data this week including ISM, factory orders and durable goods.  All of these numbers are important in gauging not just the prospects of another Fed move this month, but also how far the FOMC are likely to push rates into 2019.  This outlook will be critical to a number of emerging market currencies.”

“The worst performing Asian currencies in the year to date are the INR followed by the IDR. The falls in these currencies are overshadowed by the 49% year to date plunge in the ARS and the 43% dive in the TRY.  The BRL, ZAR and RUB have also suffered particularly heavy losses.”

“In the near-term, the likelihood that the Fed will hike rates again in the next few weeks, coupled with the fear of further US tariffs on Chinese goods and the upheaval in Turkish and Argentine currencies suggest that the capital outflow from EM has further to extend.  For this reason we maintain our broadly bullish outlook for the USD.”

“The souring in sentiment in EM was the principal reason that we turned bullish on the USD earlier in the year. We turned constructive on the USD vs. the EUR in the middle of March on the expectation that the USD would benefit to a greater extent than the EUR from the EM outflow.”

“For now we expect that EUR/USD has further to fall on the back of outflows from EM.  However, by H2 2019 we see scope for the EUR to start fighting back some lost ground.  We a forecasting a move to EUR/USD1.13 on a 6 to 9 month view.”