A surprisingly dovish Bernanke tumbles the US dollar
On 10 July, the FOMC minutes revealed a majority of voting
members would like to see further improvements in the labour market before
slowing the pace of the asset purchases. Shortly after, Mr Bernanke's was
particularly dovish, notably mentioning that a hike in short-term rates was
unexpected in the foreseeable future. Therefore, as the start and the pace of
the tapering remain highly questionable, an update on our forecasts for the
greenback seems warranted.
US energy independence is a long-term positive for the USD
The persistent reduction of US dependency on foreign source
of energy should act as a long-term supportive effect on the US dollar. Indeed,
the lower costs of imported energy and, eventually, the generated profits
through natural gas exports should lead to a structural improvement of the current
account deficit. Furthermore, the US has significantly decreased its budget
deficit through a reduction in public spending and increase in tax revenues.
From an extreme at -10.4% of GDP, it stands now at -5.7% (as of end of March).
Therefore, the "twin deficits" is unlikely to remain a structural
drag for the US dollar. On the other hand, the deficit reduction in the US
should lead to a further reduction of the current account surplus of many
emerging countries, causing a devaluation of their currencies versus the US
dollar.
Slowing diversification out of USD for FX reserves
The growth of foreign exchange reserves has been impressive
this last decade, with the side-effect of prompting a diversification out of
the US dollar whose rates were unattractive. However, the slowing reserve
accumulation (notably in China) and reduction in diversification out of the US
dollar indicates that the Euro could lose of its biggest supporters.
Global monetary policies should continue to lift the US
dollar
The Fed has been the first central bank to lower rate at the
onset of the financial crisis and to introduce unorthodox monetary stimulus.
Given the economic outlook, it should also be the first to start reducing its
monetary expansion. Even though tapering may occur later than in September, the
Fed is still leading the way in the liquidity cycle compared to the other
central banks. Therefore, in the medium-term, the US dollar should continue to
benefit from global monetary policies. Furthermore, the dovish intervention of
Mr Bernanke should also partly be put in context with the recent dovish
comments of Mr Draghi and Mr Carney. By talking down interest rates, he reduces
the risk that a too steep rising cost of borrowing chokes the recovery.
Safe haven status and valuation in favour of US dollar
Looking at the Purchasing Power Parity, the US dollar
remained undervalued against most major currencies (see our last report). A
notable exception is the Japanese yen. However, the BoJ's aggressive monetary
stimulus, which is expected to continue till the end of 2014, should hamper any
sustainable decline in USD/JPY. Coming back to the future tapering of the Fed,
the safe haven status of the US dollar is attractive. Indeed, the strong rise
in asset prices, boosted by the massive injection of liquidity from central
banks, could suffer from a reduction in monetary policies. In such a case,
investors could repatriate their money in safe havens, such as the US dollar.
The technical configuration remains supportive of a stronger
USD
From a technical point of view, many currencies compared to
the dollar were close to critical levels (EUR: 1.2797-1.2662, GBP: 1.4832, CHF:
0.9839) or were likely forming short-term bases (AUD). Coupled with short-term
overbought conditions in the US dollar index, the US dollar was ripe for a
corrective phase. In the end, the unexpected dovish stance from Mr Bernanke
sparked an impressive decline in the USD fueled by elevated long USD positions.
Looking at the US dollar index (see chart), the mild succession of higher lows
and lower highs remains in place. Even though a break of the support at 80.50
(June 2013 low) is needed to invalidate this positive configuration, a break of
the support at 82.12 (61.8% retracement of the previous rise) would already put
in jeopardy our bullish technical scenario. Another interesting resistance to
monitor is the one at 1.5305 on GBP/USD (3 July 2013 high). A break of this
threshold would weaken our technical interpretation of the US dollar.
Buying the US dollar on weakness remains our preferred
strategy
For all these aforementioned factors, we continue to favour
further significant medium-term strength in the US dollar. However, the renewed
uncertainty on the timing is likely to stem further short-term price
volatility. Therefore, it could be wiser to let prices digest the recent news
and form a more tradable technical configuration. For the time being, levels
close to 82.12 on the US dollar seems an attractive entry points. Moreover,
currencies like the Australian dollar are less dependent on the US tapering
than on China's rate of growth. Therefore, AUD/USD close to 0.9345 (26 June
2013 high) could be an attractive entry point for a short AUD/USD position.
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