Most major currencies will hold on to their gains made in 2017 against the dollar over the coming year, according to a Reuters poll of currency strategists who were not entirely convinced of the US administration's ability to pass through tax cuts. A raft of robust data out of the United States and new general plans on tax reform from the White House sent the dollar to a seven-week high on Tuesday and up almost 3 percent last month.
But the latest poll of over 60 strategists taken this week showed the greenback will at best be where it is now in three, six, and 12 months as predictions were largely unchanged, suggesting the current rally will mostly be short-lived.
That was also partially reflected in predictions for dollar positioning at the end of October. Speculators' net short bets on the dollar are at their highest since late September 2012, according to the Commodity Futures Trading Commission data. A touch more than half of 38 respondents who answered an extra question said those bets will decrease by the end of the month, while 10 said they will remain the same.
While only two strategists said bets against the dollar will increase, just six of them said there will be a reversal in positioning in favour of the greenback. "The USD's multi-year record net-short positioning should remain at high levels in October in the absence of any major drivers from the monetary and fiscal sides," said Roberto Cobo Garcia, FX strategist at BBVA.
"But expectations about fiscal expansion and additional monetary tightening should prevent speculators from hoarding additional USD short positions." Expectations have been weighed lower for the dollar on the lack of belief the US administration will be able push through any form of tax reforms.
Indeed a simple majority of strategists, 24 of 43, who answered an extra question said they do not expect tax cuts will make it through Congress this year. The remaining 19 respondents said they will. Strategists' hesitation in calling for a stronger dollar has also been driven by muted expectations now of higher interest rates in the United States and already mostly priced-in, than the shift in central bank policy in other developed markets.
"The current external environment is less favourable for the dollar, with the global economy strengthening and other major central banks as well moving to tighten policy," said Lee Hardman, currency economist at MUFG. "It basically is diminishing the relative appeal of the dollar. One of the key assumptions is that, we don't think the Fed will be speeding up the pace of rate hikes. Going forward, it is more likely that they could slow the pace of rate hikes."
The euro has gained ground - up almost 12 percent against the dollar - this year on solid economic momentum in the currency bloc and on expectations the European Central Bank will scale back its massive stimulus starting next year. The minutes of the ECB's September policy meeting released on Thursday showed policymakers debated the trade-off between various options for extending its asset buying and a reduction.
But policymakers also expressed concern and mentioned the potentially negative aspects of a strong euro and its impact on inflation at the meeting. The single currency is now forecast to stay around the $1.18 it was last trading on Thursday in a month, and over the next 3-6 months. It is then expected to add about 2 percent to $1.20 in a year.
If those predictions for end 2017 are realised, it will mark the first year of gains for the euro since 2013. While expectations are for currency markets to trade in ranges, forecasts were more in favour of the euro in a year's time, with higher highs and higher lows.
Market expectations are that Japanese Prime Minister Shinzo Abe will prevail in a snap election he called for October 22, seeking a mandate to stick to his tough stance toward a volatile North Korea and rebalance the social security system. In support of his political and economic agenda, the consensus of responses for an extra question was for the yen to be unchanged in the immediate aftermath of that election if Abe-led Liberal Democratic Party (LDP) wins a decisive or even a simple majority.
That is also in line with the broader poll expectations for the yen to trade around the current 112 per dollar in a month and weaken only slightly to 114 in a year. "I think a lot of what has been done has already altered the (yen's) price," added Hardman.
"Monetary policy is already very aggressively loosened and if anything it looks more likely that monetary policy could be kind of reaching its limits in terms of how aggressive the BoJ is willing to be at this point in time."
Comments
Comments are closed.