160322 fx watch

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FX Watch

22 March 2016

The dollar rally is over

Introduction

The US dollar has seen a strong rally over the last few years. The US dollar index rose by

36% from September 2012 to February 2016. However, it is down by close to 7% since

February of this year. The rally did not come in one straight line. The largest moves were

in the following periods: September 2012 to May 2013 and July 2014 to March 2015. We

have been positive on the US dollar since the end of 2012. We now think that the dollar’s

upswing is over. Below we explain why and set out our key FX forecasts. In tomorrow’s

FX Weekly we provide more details on the individual pairs.

Calculated effective Exchange rate US

Index

Source: BoE, Bloomberg

70

80

90

100

110

120

130

00 02 04 06 08 10 12 14 16

Calculated Effective Exchange rate US

Group Economics Macro & Financial Markets Research

Georgette Boele

Co-ordinator FX & Precious Metals

Strategy

Tel: +31 20 629 7789

[email protected]

The dollar multi-year uptrend is over in our view

The uptrend rested on three crucial drivers:

Monetary policy divergence, rising EM risks and the collapse in

commodity prices

Recently these three drivers have become less positive for the dollar

ECB and BoJ policies are not aggressive enough to pull down their

currencies and the Fed will likely stay on hold…

...as well the outlook for commodity prices is improving …

…and RM risks are priced in…

Political risk is rising in the US and the technical picture has turned

2

FX Watch - The dollarr rally is ove

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ECB a

are no

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the eu

that it

limit. F

0

100

200

300

400

500

er - 22 March

ollar strength

S dollar bull ru

ence (Septemb

odity prices (Ap

led to a collaps

cember 2012 th

erall outlook on

ening the yen. A

ushed aggress

ary policy. This

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nce sheet and

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and BoJ polic

ynamics for mo

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t as effective in

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is willing to cut

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06 07 08 0

h 2016

h rested on th

n rested on thr

ber 2012 - May

pril 2011 – mid

se in EM curre

he landslide ele

n the yen. This

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sively lower. In

s pushed the e

site direction b

f lift-off in rates

ng the US dolla

opments that a

uch slower grow

are closely rela

mentals from g

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matic impact o

orse (for exam

me less positiv

d yen

t

N AMRO Group Ec

cies not aggr

onetary policy d

f Japan will like

n generating cu

the credit chan

h as deposit ra

t rates further i

ets have under

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BoJ TW

hree importan

ree important d

y 2013 and July

d February 201

ncies (commod

ection victory o

s is because mo

pectations of su

2014 the ECB

euro sharply low

by preparing fin

thereafter. Thi

ar.

also pushed the

wth in most ec

ated). Emergin

growth to high U

s. The prospec

tion building fro

nce on US dolla

ent flows. The

n their econom

ple Brazil and

ve for the US d

conomics

ressive enoug

divergence hav

ely continue mo

urrency weakn

nel rather than

ate cuts). The B

nto negative te

rstood these lim

2 13 14 15

WI Japan

nt drivers

drivers namely

y 2014 – March

6) and the rise

dity EM FX mid

of Prime Ministe

onetary policy

uch a policy sta

also shifted to

wer as a result.

ancial markets

s monetary po

e dollar higher

onomies, and t

g market weak

US dollar-domi

ct of the Fed ta

om July 2014 o

ar financing an

sharp fall in co

mies while politi

South Africa).

dollar.

TWI Japan

gh to pull dow

ve changed this

onetary policy

ess anymore.

to take measu

Bank of Japan

erritory but also

mitations and h

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175

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monetary polic

h 2015), the co

e in emerging m

d 2011 – Febru

er Abe in Japa

would be gear

arted to surfac

o a much more

. Meanwhile, th

s for tapering Q

olicy divergence

are the rise in

the collapse in

kness was mai

inated debt as

apering (in 2013

on) weighed on

nd investors tur

ommodity price

ics in some co

Recently, the

wn their curre

s year. For a s

easing but the

In the case of

ures that aim to

may have com

o here there se

have pushed th

cy

ollapse in

market risks

uary 2016).

n changed

red towards

e, the yen

aggressive

he Fed

QE in 2013

e played a

emerging

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well as

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n these

rning to the

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encies…

tart, the

ir policies

the ECB,

o weaken

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bottom

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Russia

growth

versus

smalle

100

150

200

250

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er - 22 March

n higher as a r

cy at the start

th the Fed and

n. In short, we

down their curre

nce sheet and

ECB balance shee

Bloomberg, ABN

d the Fed like

s the Atlantic, t

expectations o

ehaviour. We th

ming more hawk

oo much US do

ng negative spi

llar strength fa

ted this may no

on expectations

on the US doll

d the curve, wh

ses and/or rate

ve for the US d

well the outlo

nk that commo

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ers and their c

central banks t

nd, and Norway

se currencies.

duce inflation p

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06 07 08 0

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result. In additio

but after some

d the US dollar

expect that the

encies.

d euro

et

N AMRO Group Ec

ly to stay on

the Fed has ha

of financial mar

hink it is unlike

kish than expe

ollar strength, w

illovers for EM

lls away. Even

ot be dollar pos

s were to rise m

lar. In such a s

hich is negative

e increases is h

dollar.

ook for comm

odity prices and

mmodity prices

currencies. Late

that have been

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On the other h

pressures in co

central banks i

a positive deve

urrencies. In sh

ed or could eve

09 10 11 12

ECB T

on, QE may be

e time it also los

and we are no

e BoJ and the

conomics

hold…

ad the tendency

kets. The FOM

ly that the Fed

ected in the futu

which could dam

economies. Th

n if the Fed wer

sitive. For insta

more substantia

ituation, financ

e for a currency

higher than tha

odity prices

d currencies of

s will initially im

er on, this will b

n easing monet

ed to be less a

hand, a further

ountries such a

n these countr

elopment. As a

hort, the monet

en turn against

2 13 14 15

TWI EU

e very successf

ses some of its

ow also experie

ECB will not be

TWI eurozone

y to shift its rate

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will surprise fin

ure because the

mpen US grow

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re to hike more

ance, in a situa

ally than expec

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y. In addition, if

at of growth, thi

and EM is im

f commodity ex

mprove the sent

be felt in their e

tary policy (Can

accommodative

recovery in em

s Brazil, Chile,

ies could focus

result, the US

tary policy dive

the US dollar.

80

85

90

95

100

105

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ful in weighing

s impact. We h

encing it with th

e aggressive e

e hike path tow

16 March also

nancial market

e Fed will not b

wth & inflation a

stantial driver o

e aggressively t

ation where infla

cted, this would

ould believe tha

f the pace of in

is would be ou

mproving…

xporting countr

timent towards

economies. On

nada, Australia

e. This will be s

merging marke

, Mexico, South

s more on supp

dollar will likely

ergence will like

on the

ave seen

he euro and

enough to

wards the

o reflected

ts by

be happy

as well as

f a possible

than

ation or

d likely

at the Fed is

nflation

tright

ries have

s commodity

n the one

a, New

supportive

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h Africa and

porting

y weaken

ely be

4


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signal

and a

phase

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Index

Source:

-1.0

-0.5

0.0

0.5

1.0

70

80

90

100

110

120

130

er - 22 March

versus CRB

rolling correlation

Bloomberg

cal risk is risi

olitical risk in th

ming to be the R

es are unclear.

d technical pic

S dollar index a

ges. This could

is quite strong

new trend has

will likely be fo

ulated Effecti

Bloomberg, BoE

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10 11 1

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lculated Effective E

0-day moving avera

asing with the r

ndidate for the

arified this could

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S dollar pairs h

eak. But as sev

we think that the

e near-term the

onger-term dow

e rate US

12 13 14

vs CRB Index

10 12

Exchange rates US

age

ise in probabili

Presidency. Hi

d be negative f

have broken be

veral pairs have

e US dollar mu

behaviour cou

wn trend of the d

15 16

14 16

ity of Donald T

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for the US dolla

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e taken out this

ulti-year uptren

uld be volatile.

dollar.

rump

d foreign

ar.

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d has ended

Such a

5

FX Watch

ABN AMRO

Changes in red/

Source: ABN AM

ABN AMRO

Changes in red/b

Source: ABN AM

EUR/USDUSD/JPYEUR/JPYGBP/USDEUR/GBPUSD/CHFEUR/CHFAUD/USDNZD/USDUSD/CADEUR/SEKEUR/NOKEUR/DKK

USD/CNY (oUSD/CNH (oUSD/INRUSD/KRWUSD/SGDUSD/THBUSD/TWDUSD/IDRUSD/RUBUSD/TRYUSD/ZAREUR/PLNEUR/CZKEUR/HUFUSD/BRLUSD/MXNUSD/CLP

- The dollar

O major curre

/bold

MRO Group Econo

O Emerging m

bold

MRO Group Econo

2

2onshore)offshore)

r rally is ove

ncy forecasts

omics

market curren

omics

22-Mar Q1.1267111.68125.831.44110.78370.96861.09130.75830.67581.30799.25659.42777.4543

22-Mar Q6.486.4866.5

1,1641.36

34.8932.40

13,15268

2.8615.274.26

27.043113.62

17.38679

er - 22 March

s

cy

Q2 2016 Q3 1.151131301.400.820.961.10

0.760.681.309.259.257.46

Q2 2016 Q3 6.556.55

66.51,1651.36

35.00 332.50 3

13,200 1366

2.8515.004.30

27.00 23103.60

17.25670

h 2016

2016 Q4 21.15 11141311.42 1

0.81 00.96 01.10 1

0.76 00.68 01.28 19.25 99.00 87.46 7

2016 Q4 26.60 66.60 6

67.0 61,165 1,1.38 1

35.00 3532.80 333,400 13,

642.80 2

14.75 144.30 4

27.00 273103.55 3

17.00 16660

016 Q1 2011.15 1.1115 11132 131.48 1.5

0.78 0.70.96 0.91.10 1.1

0.76 0.70.68 0.61.26 1.29.25 9.28.75 8.57.46 7.4

016 Q1 2016.70 6.76.70 6.7

67.0 67165 1,151.40 1.35.00 34.83.00 32.8500 13,4060 5

2.75 2.74.50 14.24.25 4.27.00 26.5305 303.50 3.46.75 16.5650 64

17 Q2 201715 1.1514 11231 12950 1.5277 0.7697 0.9711 1.12

77 0.7869 0.7025 1.2425 9.0050 8.5046 7.46

17 Q2 201775 6.8075 6.80

.0 66.050 1,14038 1.3680 34.6080 32.5000 13,30059 5875 2.7525 14.0020 4.1550 26.2500 30045 3.4050 15.7540 630

Q3 20171.151101271.540.750.981.13

0.790.711.239.008.257.46

Q3 20176.806.80

65.51,1301.35

34.4032.20

13,20057

2.7513.754.15

26.002953.35

15.50620

Q4 20171.151081241.560.740.991.14

0.800.721.208.758.257.46

Q4 20176.806.80

65.01,1201.35

34.0032.00

13,00055

2.7513.504.10

25.502903.30

15.25600

6

Fin

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