USD: All over? - Rabobank

In view of Jane Foley, senior FX strategist at Rabobank, the prospect of easier policy from the Federal Reserve combined with hopes for some softening in the trade tensions between the US and China are behind the softer tone of the USD in recent sessions.

Key Quotes

“Expectations of a loosening in monetary settings from the Fed has helped support a rise in the MSCI EM index of nearly 7% since the end of May.  Flows in and out of EM can be a strong indicator for the performance of the USD.  That said, while the promise of cheaper USD funding costs is a huge encouragement for risky assets, geopolitical tensions and slowing world growth are not.  This factors are likely to counter some of the market’s enthusiasm and temper the downside potential of the USD in the months ahead.”

“The Fed is widely expected to cut rates at next month’s policy meeting and it is our projection that a second insurance rate cut is possible by the end of the year before a full blown easy cycle is embarked upon in 2020.  In isolation this would appear to be a very dovish signal for the USD.”

“While easier monetary policy settings are a comfort to investors, the impact is likely to be outweighed if growth deteriorates and or if the geopolitical climate worsens. Over the past few weeks tensions between Iran and the US have intensified.  Although the JPY remains the favoured safe haven currency on geopolitical risks, if EM assets wobble on such events the USD is likely to find some support against a broad-basket of currencies.”

“In respect of trade wars, the market is placing a lot of store on hopes of a meeting between Presidents Xi and Trump on the side-lines of this month’s G20 meeting. A relief rally in risky assets would almost certainly be triggered next week if some progress was made in some aspect of the trade wars.  This would likely coincide with a softer USD.”

“Although the impact of slowing world growth will be softened by central bank action, in all likelihood the mood in EM is likely to become cautious.  This too suggests that the USD will remain relatively firm against a wide range of currencies.  Currently we are forecasting EUR/USD at 1.15 on a 12 month view.  However, if flows into EM are stymied by a further deterioration in geopolitics or world growth, the USD could remain firmer for longer.”