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Monday, 10 July 2017

Dollar bulls stumble as euro's outlook brightens: Reuters poll


The multi-year rising trend for the U.S. dollar appears to have hit a wall, with a majority of foreign exchange strategists polled by Reuters less bullish on the greenback than at the start of the year and more optimistic about the euro.

The dollar has taken a beating in 2017 as economic growth and inflation in the United States has not taken off as previously thought, and President Donald Trump's reflationary policies have hit a series of political obstacles.

"The outlook for the dollar is less bullish than at the beginning of the year...given that the fiscal stimulus has not yet materialized and that the likelihood of any announcement in the second half of the year looks limited," said Roberto Cobo Garcia, FX strategist at BBVA.

The dollar index, which measures the greenback's performance against a basket of currencies, has lost nearly 6 percent this year, marking its weakest performance for the first half of a year in well over a decade.

While Reuters foreign exchange polls this year have predicted the dollar to strengthen slightly, the latest poll of around 70 strategists taken over the past week showed the outlook has broadly dimmed.

A majority of strategists, 43 of 71, who answered an extra question said their dollar outlook was less bullish now compared with the beginning of the year. Seventeen said they were more bearish, only five said they were more bullish, and the remaining six strategists said they were less bearish.

Speculators have also cut bets in favor of the dollar. Net long positions fell to their lowest in a year, according to data from the Commodity Futures Trading Commission and calculations by Reuters.

POLICY DIVERGING LESS?

Improving economic growth in Europe and Canada has opened the door for a shift in monetary policy. Hints from both the European Central Bank and Bank of Canada that may happen soon have ramped up those expectations.

Pushing in the opposite direction, Fed minutes on Wednesday showed policymakers were increasingly split on the outlook for inflation and how the lack of it might affect the future pace of interest rate rises.

"The policy divergence trade, which created a significantly stronger dollar, is looking less and less well-grounded," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

"We could see less policy divergence going forward between the Fed and other central banks and that should encourage further reversal of dollar strength."

But some strategists struck a more positive note.

Valentin Marinov, head of G10 FX strategy at Credit Agricole CIB, argued that the shift in central banks' focus away from inflation and instead towards growth should help the dollar.

"Several G10 central banks have dropped their easing bias of late while the Fed has remained committed to its tightening cycle. This has given rise to the FX convergence trade where investors buy currencies with an improving growth outlook and ignore their challenging inflation outlook."

"(The dollar) remains a reliable long - the 'cash cow' of the convergence trade – and it should benefit from an improving U.S. growth outlook" in the second half of this year," added Marinov in a note to clients.

EURO FLAVOR FAVORED


The euro has gained around 8 percent against the dollar in 2017 so far. It is predicted to hold onto those gains over the coming 12 months, trading at around $1.13, roughly where it is now, and in one and 12 months' time.

That 12-month view is the strongest euro bet since a January 2015 Reuters foreign exchange poll, the month when the ECB announced that it would start buying bonds on a monthly basis.

A little over half the common contributors compared with the previous month have upgraded their 12-month euro view.

At the beginning of 2017, there were several forecasters calling for the euro to crash below parity to the dollar, but not a single strategist in the latest poll expects that to happen over the coming year.

That is mostly thanks to ECB President Mario Draghi's more upbeat assessment on the euro zone economy. However, Reuters polls over several years have been clear that a fall below parity wasn't likely.

"There is further scope for recent EUR trends to extend, but this is contingent on how ongoing ECB rhetoric unfolds from here," noted Daniel Hui, executive director of global FX strategy at J.P. Morgan.

"While EUR/USD is already very close to our year-end target of 1.15, this is not necessarily a hurdle, given that the strength in the pair is as much a manifestation of broad USD weakness, given the extreme subdued pricing for the Fed."

Reference: Rahul Karunakar and Hari Kishan

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