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What are the chances of a big USD rally? - Nomura

FXStreet (Bali) - According to Nomura FX Strategists, their central case is for a gradual further appreciation of USD, with decent momentum over the next six months.

Key Quotes

"The price action in recent days points to a renewed broadening of the USD move, involving commodity currencies, although a number of EM currencies have remained fairly resilient."

"An outsized and broad-based move such as those in the early 1980s and late 1990s may not be realistic in the current macro environment. There are a number of specific features, which will likely constrain USD‟s ability to stage a gold or silver medal rally. Importantly, inflation dynamics are more global than in the past and global inflation dynamics are currently depressed. As such,, the Fed is likely to have room to be patient both in terms of lift-off and its pace of tightening after lift-off. In addition, global capital markets have deepened and US risk assets have plenty of competition from other asset markets around the world, including emerging markets. Hence, a huge spike in capital inflows into the US is probably unlikely, especially given remaining concerns about its long-term growth rate."

"Hence, our central case is a gradual further appreciation of USD, with decent momentum over the next six months as the Fed lift-off becomes more fully priced and hedging policies are adjusted (after a more than 10-year USD bear market). The specific composition (involving EM or not) will depend critically on whether the Fed is willing to send a hawkish signal, or whether they decide to remain more defensive."

"There are risks to this view in both directions: An unexpected slowing of the US economy could derail the current appreciation process, as could a signal that the Fed is paying more attention to lower headline inflation (which will be depressed by energy prices). A key risk in the other direction includes further deterioration in the eurozone outlook and a reigniting of financial market tensions in Europe. Such tensions could see much bigger moves in USD versus European currencies than our central case currently implies."

"For now, we stick with USD longs versus JPY and EUR (both in call spread form), but we look for an opportunity to broaden exposure, including to selected EM currencies, especially as we get closer to FOMC announcements. The current wave of USD gains may not reach the extreme proportions seen in the early 1980s and late 1990s But we believe this is a structural move that may eventually reach a 3rd place in the historical ranking of BIG dollar moves."

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