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Forex Flash: The coming dollar revival - Nomura

FXstreet.com (Barcelona) - Nomura strategists note that after tumult of last week, with central bank meetings and payrolls, this week was relatively quiet. USD was mostly weaker in G10, but more mixed in EM. Equities were up.

They have previously commented on USD within the context of equity-related inflows and note that it has traded well in 2013. They add that its correlation to risky assets has begun to turn. At the same time, equity inflows have picked up, which has been important in the past for USD. Indeed, they write, “Official data show sizable equity inflows during Q4, and leading indicators for January and February confirm this picture.”

They feel that although a continuation of monetary policy easing and weaker US data in Q2 could delay a broader USD recovery, if inflows into US risky assets continue USD should eventually benefit. While the focus has been more on fixed income US inflows (related to such items as reserve flows and safe-haven flows), in the past there have been periods when equity-related flows have been important. They write, “One example was in 2005, when HIA legislation spurred repatriation of foreign FDI, triggering a wave of dollar buying. This was also true in 1999-2001, when FDI and equity inflows helped USD to appreciate. We will be closely tracking official data and higher frequency indicators, to ascertain whether this trend in equity inflows is solidifying. In this context and as these trends are confirmed by incoming data, we will revisit our longer-term global dollar forecasts over the next few weeks, looking to incorporate more medium-term USD upside.”

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