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USD bull trend: three phases to unfold - Nomura

FXStreet (Bali) - Nomura FX Strategists share their thoughts on the US Dollar bullish trend, dividing the currency performance into three different phases.

Key Quotes

"The dollar had an outsized move during the third quarter. This move is broadly consistent with our view that we would see accelerated USD gains in August-October, in line with better US growth momentum and weaker forward guidance from the Fed. But the dollar has already come a long way, and dynamics are shifting as we head into Q4. The first phase of dollar gains may be coming to an end."

"The second phase of dollar dynamics will probably be more about reduced global liquidity and higher market volatility. The nature of dollar dynamics is evolving. In particular, we think batches of significant EM underperformance are likely in the near term, although we acknowledge that this view is predicated on the assumption that we will eventually see US rates drift higher. Linked to this, we have been focusing more on long USD/EM risk over the past months, after initially concentrating USD views in G10."

"The third phase of the dollar trend will be determined in 2015. Will the Fed be able to hike rates more than is currently priced in the market? If yes, we can have a sustained dollar move, and some form of extrapolation of the momentum in Q3 may be warranted (even if statistically rare). If no, there could be a period of consolidation, or perhaps even a reversal of optimism about the US economy and the prospect of rates liftoff. Given the positioning picture, and one-sided bullish USD sentiment, this could generate a substantial washout, and temporary dollar losses."

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