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29 Oct 2014
Important USD-bullish secular shifts in train - ANZ
FXStreet (Bali) - ANZ offers their medium-term view on the USD, arguing that the USD is still likely to be one of the strongest currencies, with the bank adding that there are some important USD-bullish secular shifts in train.
Key Quotes
"From a medium-term perspective the main problem for risk assets remains the same: namely that both the risk and the reward continue to tilt against them. The FOMC still seems on track to gradually reduce liquidity over time, which is raising the funding costs for risk assets by making the USD more attractive and pushing front end yields in the US higher. And the ongoing structural adjustment in China and the poor growth profile for EM outside Asia is damaging the return potential for currencies in Asia and the commodity block."
"In this vein we continue to argue that the main US focus for currencies should be the front end of the bond curve, and not the long end as was the case last year. It has become increasingly clear that the long end of the US curve is influenced as much by global asset flows as it is by potential US monetary policy developments. The October fixed income ‘flash crash’ accentuates this point. There are some broader signals from that event also."
"If the deepest and most liquid financial market can post price action like on 15 October, then it highlights why we are still so puzzled that so many seem confident that other far less liquid assets, with plenty of new tourism investors, will handle the shift to tighter global liquidity in better shape. In fact one might argue that the only economic trend not upset by the financial market ructions of the past 18 months is the improving economic trajectory of the US. In this vein, the fed funds futures are now only pricing one rate hike by the end of 2015. This well and truly seems to be on the skinny side, and will become an issue for currencies once the current consolidation period has passed."
"In addition, we continue to argue that there are some important USD-bullish secular shifts in train also. In particular, the trade balance has shown an improving trend over the past few years. In this sense the current US recovery is quite unusual. It is the first recovery since the late 1990s where a domestic US upswing has not been associated with a deteriorating US trade account. The US is not, in other words, ‘exporting’ growth to the rest of the world in a way that we have been used to, but it is still acting to withdraw the liquidity to which the world has become addicted."
Key Quotes
"From a medium-term perspective the main problem for risk assets remains the same: namely that both the risk and the reward continue to tilt against them. The FOMC still seems on track to gradually reduce liquidity over time, which is raising the funding costs for risk assets by making the USD more attractive and pushing front end yields in the US higher. And the ongoing structural adjustment in China and the poor growth profile for EM outside Asia is damaging the return potential for currencies in Asia and the commodity block."
"In this vein we continue to argue that the main US focus for currencies should be the front end of the bond curve, and not the long end as was the case last year. It has become increasingly clear that the long end of the US curve is influenced as much by global asset flows as it is by potential US monetary policy developments. The October fixed income ‘flash crash’ accentuates this point. There are some broader signals from that event also."
"If the deepest and most liquid financial market can post price action like on 15 October, then it highlights why we are still so puzzled that so many seem confident that other far less liquid assets, with plenty of new tourism investors, will handle the shift to tighter global liquidity in better shape. In fact one might argue that the only economic trend not upset by the financial market ructions of the past 18 months is the improving economic trajectory of the US. In this vein, the fed funds futures are now only pricing one rate hike by the end of 2015. This well and truly seems to be on the skinny side, and will become an issue for currencies once the current consolidation period has passed."
"In addition, we continue to argue that there are some important USD-bullish secular shifts in train also. In particular, the trade balance has shown an improving trend over the past few years. In this sense the current US recovery is quite unusual. It is the first recovery since the late 1990s where a domestic US upswing has not been associated with a deteriorating US trade account. The US is not, in other words, ‘exporting’ growth to the rest of the world in a way that we have been used to, but it is still acting to withdraw the liquidity to which the world has become addicted."