Banks convinced dollar rally has lots of room to run in 2016
BLOOMBERG DOLLAR SPOT INDEX HAS GAINED 9% IN 2015, FOLLOWING AN 11% ADVANCE IN 2014
Buy the dollar. Again. That’s the message for next year from the biggest banks trading in the $5.3-trillion-aday (Dh19.46 trillion) currency market.
Deutsche Bank AG, the world’s second-largest currency trader in Euromoney rankings, says the dollar’s rally has plenty of room to run — another two years, and about 10 per cent on a trade-weighted basis. JPMorgan Chase & Co. says the dollar will strengthen versus the currencies of New Zealand and Singapore, peaking in the second half of 2016.
Goldman Sachs Group Inc., Barclays Plc and Credit Suisse Group AG are also bullish as the Federal Reserve moves toward raising interest rates for the first time in almost a decade.
“We expect broad dollar appreciation in 2016,” said Todd Elmer, a currency strategist in Singapore at Citigroup Inc., which was first in the Euromoney rankings. “If the market moves to price in a steeper trajectory from the Fed, then that’s going to bring back the theme of cyclical and policy divergence between the US and other major economies.”
While the Bloomberg Dollar Spot Index has gained 9 per cent this year, following an 11 per cent advance in 2014, its ascent has been bumpy.
Analysts cut forecasts last quarter due to weaker-than-estimated US economic data and a slowdown in China. Since October, the dollar rally has been reignited by Fed policymakers who said growth is robust enough to justify a rate increase at the central bank’s December 15-16 meeting.
Companies from Delta Air Lines Inc. to Whirlpool Corp. have already blamed a stronger dollar for hurting overseas sales. With hedge funds and other large speculators holding bullish dollar futures positions close to an all-time high, the trade may be prone to reversal.
Buy US dollar, sell euro
Recommended by: Deutsche Bank, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse.
Foreign-exchange markets were dominated in 2015 by the idea that the US will boost rates in contrast with easing by the European Central Bank and other global peers. As the Fed tightens, the greenback may climb to parity with the shared currency in the second quarter, according to 17 of more than 60 analysts surveyed by Bloomberg.
After the ECB’s “disappointing” forward guidance on December 3, “policy ease will be held longer or be increased, meaning a deeper trough for euro-dollar,” wrote analysts led by Jose Wynne, head of foreignexchange research at Barclays in New York. He expects the dollar to strengthen to 95 cents per euro by the end of next year. That’s more bullish than the median estimate of $1.05 per euro by the end of 2016, the survey showed.
Buy US dollar, sell yen
Recommended by: UBS Group, BNP Paribas, Goldman Sachs, RBC Capital Markets.
“The Japanese economy faces significant challenges, with the inflation target remaining elusive, and continuing negative gross-domestic-product growth,” analysts including Daniel Waldman, co-head of foreign-exchange and rates strategy at UBS in New York, wrote in a December 10 report. Slowing exports may also drive the yen lower, he said.
Buying the dollar against the yen is the best way to make a bullish bet on rising US rates, according to Adam Cole, head of G-10 foreign-exchange strategy in London at RBC.
Buy dollar, sell offshore Chinese yuan
Recommended by: Bank of America, Barclays, Danske Bank.
China’s yuan may depreciate as much as 10 per cent against the dollar in 2016 as the US boosts borrowing costs, according to David Woo, head of global rates and foreign-exchange strategy at Bank of America.
His favourite trade is a sixmonth forward contract to buy the dollar and sell the offshore yuan.
China’s shock devaluation of the yuan in August was the “defining event” of this year, Woo wrote on December 8.
And now, “the US dollarrenminbi (yuan) peg, a marriage of convenience that has been the anchor for the global growth model for the better part of the last 15 years, is headed for a divorce.”