The immortal dollar: a new wave of strengthening on the horizon
No matter what prospects analysts promise the US currency, no matter how much noise and negatives accumulate around the dollar, it will break through, as always. What is the secret?
According to JP Morgan, behind the current strengthening of the dollar and the potential for its further growth, there is mainly a factor such as “US exclusivity”.
The economy of the States continues to surpass other countries in most of the world. In September, the IMF worsened global economic estimates for the next two years and worsened the outlook for the euro area and many developing regions.
The positive picture in the United States allowed the Fed to tighten monetary policy. At the September meeting, Jerome Powell hinted that the Central Bank plans to raise the rate again in December. This will be the eighth boost in the current tightening cycle. FOMC members expect three more tightening in 2019. Meanwhile, the ECB and the Bank of Japan are not going to raise rates.
The divergence of monetary policy courses feeds the dollar rally, according to HSBC. The fact is that the differential of rates favorable for the US currency attracts more foreign capital into dollar assets.
Judging by the dynamics of futures on the federal funds rate, the players put in the prices the probability of three or more raises in the next year. At the same time, almost 40% put on one increase, not excluding also that the Fed can maintain the status quo.
And yet, the dollar has no absolute immunity.
However, no matter how fast the “American” is, it does not have absolute immunity. There are factors that in the medium term can restrain its growth or even deploy the current fortification.
It is about the extinction of the fiscal stimulus effect by the team of Donald Trump. Note that the decrease in IMF forecasts hurt the United States. More and more investors are beginning to understand that the American economy is approaching a turning point.
If growth slows to such an extent that the regulator will have to take a pause, then the dollar will be under pressure. Shut off oxygen to it can show signs of a recovery in the eurozone or an increase in domestic demand in China against the background of stimulating the country’s economy.
Overloaded with positions for the purchase of US currency market may be at risk. The net long position of funds with a large share of borrowed funds is currently around $ 27 billion, according to the CFTC data. Yes, this is not a record figure, but it remains quite high.
In the case of a large-scale correction or a massive closure of these positions, the dollar risks losing about 5%, calculated in ING. Therefore, his rally becomes “uncomfortable”, although now few people are willing to admit that it is time to wrap up.
On Wednesday after the opening of trading in New York, the dollar index rises to its maximum level in two days. Market participants are concerned about the state of relations between Saudi Arabia and the United States after the disappearance of the famous journalist Jamal Khashoggi. Republicans in the US Senate talked about the possible imposition of sanctions against the Kingdom.
The dollar rises in price against all its competitors from the “Group of 10” in anticipation of the publication of the minutes of the last Fed meeting.
The document may shed light on the context of the adoption of a number of decisions by the Central Bank, for example, to explain why the word “stimulating” has disappeared from the text applicable to monetary policy.
“The minutes of the September meeting will emphasize the expectation of another, fourth rate increase this year in December. In addition, attention should be paid to the discussion of what will be considered the optimal course of monetary policy in 2019 (the level of the neutral rate or the need (or lack thereof) to establish a restraining monetary policy to slow down the economy),” analysts at Nomura predict.