perspectives d’investissement
Balancing global reflation with higher US yields
Key highlights
- The January dollar rally was due to positioning adjustment and the rapid rise in US nominal yields. However, we are currently in a global upswing, which has historically mattered more and pushed the US dollar lower. We reiterate our forecast of some further trade-weighted dollar depreciation this year
- Euro-dollar should continue to benefit from the global trade recovery but the pace of regional vaccination rollout programmes should be monitored carefully
- We have revised our dollar-yen trajectory higher but maintain our bias for yen appreciation
- The Swiss franc should lag the euro, and we see euro/Swiss franc moving up modestly to 1.10
- We see recent sterling outperformance somewhat stretched and expect a correction
- Upward emerging market GDP revisions for Q1, stronger energy prices, and a higher euro-dollar point to GBIEMFX gains over Q1. We prefer to remain selective in emerging market currencies, and favour the Chinese yuan, Korean won, Chilean peso, Czech koruna and Israeli shekel.
The trade-weighted (TW) dollar strengthened in January, coinciding with reductions in large speculative dollar short positioning and the very rapid (as well as unexpected) rise in US 10Y yields on the back of the reflation theme. We do not expect this will provide lasting support to the dollar – indeed gains have fizzled out in February – for the following reasons.
First, the reflation theme is global as activity and trade are picking up worldwide. In periods like this, global improvements in GDP growth prospects (USD-negative) are more important than the rise in US nominal yields (USD-positive). Second, despite the spike in US10Y nominal yields, real US yields, which are more closely correlated with USD movements, remain severely supressed and negative. Third, the TW dollar index is still overvalued and should come under some pressure in the months to come. Consequently, we maintain expectations of further modest USD depreciation this year. However, we note that if US nominal rates keep rising too fast, too soon, then this would put our forecasts at risk.
More specifically, we keep our EURUSD forecast at 1.27 at Q2 2021, but closely monitor developments in the European vaccination rollout programme. At the same time, we maintain our modest upward bias for EURCHF, given solid risk appetite and an acceleration in Swiss portfolio outflows. As things stand, we see the pair peaking around 1.10.
Despite sterling’s outperformance this year, we are reluctant at this stage to chase the rally and keep our forecasts unchanged. This is based on our expectation of structural headwinds due to Brexit and our anticipation of only a gradual lifting of the Covid-19 related restrictions. However, we will monitor closely development on the latter.
Turning to the yen, the upward move in USDJPY can be explained by the trimming of speculative USDJPY shorts and the rapid rise in US yields. We raise the pair’s forecast trajectory but maintain a bias for JPY strength on fundamental grounds.
In the Nordics, we reiterate our preference for the Norwegian krone and expect further NOKSEK upside. In the core commodity FX bloc, we expect moderate gains but upside is likely to be capped, mostly on less attractive valuations.
Solid expectations for emerging market (EM) Q1 growth and a stronger energy prices suggest emerging market currencies can appreciate in the coming months; that said, we reiterate our preference for a select subgroup of EM currencies. Our top pick remains the Chinese yuan, which should continue to receive medium-term support from strong underlying growth, accelerating flows to China and a gradual shift of the People’s Bank of China towards hawkishness. The possibility of lifting some of the 301 section tariffs by the US could also underpin the currency.
Main risks to our views
The main upside risk to our forecasts comes from a stronger recovery in global trade, which will send the USD into an even steeper decline and support bigger and broader rallies in the G10 and emerging markets. On the downside, we see the following risks: First, further rapid increases in US nominal yields. Second, the Federal Reserve (Fed) turning less dovish and so triggering a market reaction like 2013's "taper tantrum". Third, a delay in the distribution of Covid-19 vaccines that would increase the risk of new restrictions and economic disruption. Fourth, a premature withdrawal of fiscal support.
Information Importante
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