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25 Mar 2013
Forex Flash: Expect further USD strength in Q2 – JP Morgan
FXstreet.com (Barcelona) - Broad and significant USD strength was seen in Q1 and JP Morgan analysts expect this trade-weighted trend to persist in early spring but not for all of Q2. “Targets continue to reflect country-specific factors which have been dominating currency markets this year, rather than a top-down view on the dollar”, they wrote, pointing to the EUR/USD at 1.32, USD/JPY at 97, GBP/USD at 1.47, AUD/USD at 1.05, USD/CAD at 1.01, USD/MXN at 12.30, USD/BRL at 1.90, USD/KRW at 1060, USD/INR at 55.5 and USD/ZAR at 8.90 in Q2.
“This year’s USD rally has been extraordinary on some measures and ordinary on others. The currency has been positively correlated with equity performance, which is a rare occurrence. But this move has little to do with equity-related capital flows into the US”, wrote JP Morgan analysts, pointing a net equity outflow based on the most recent TIC data and an overstated US energy independence (“what the US has gained through a lower energy trade deficit it has given back through a wider non-energy deficit”).
The most ordinary of FX drivers have been key this year: falling interest rates in the rest of the world versus the US, whether due to growth disappointment (EUR), expectations of more easing (JPY, GBP, RUB, HUF), dovish central banks (CAD, NOK) or yen contagion (KRW, TWD), according to JP Morgan analysts, expecting further USD strength versus those currencies like JPY and GBP in Q2, “where central bank balance sheets could expand the most (in Japan, at least ¥4trn per month or 12% over six months; in UK £50bn, or 13% over six months)”. In regard to the euro, “damage from ECB easing should be minor since eonia rates are already near zero and since balance sheet expansion through an LTRO3 is very unlikely”.
“This year’s USD rally has been extraordinary on some measures and ordinary on others. The currency has been positively correlated with equity performance, which is a rare occurrence. But this move has little to do with equity-related capital flows into the US”, wrote JP Morgan analysts, pointing a net equity outflow based on the most recent TIC data and an overstated US energy independence (“what the US has gained through a lower energy trade deficit it has given back through a wider non-energy deficit”).
The most ordinary of FX drivers have been key this year: falling interest rates in the rest of the world versus the US, whether due to growth disappointment (EUR), expectations of more easing (JPY, GBP, RUB, HUF), dovish central banks (CAD, NOK) or yen contagion (KRW, TWD), according to JP Morgan analysts, expecting further USD strength versus those currencies like JPY and GBP in Q2, “where central bank balance sheets could expand the most (in Japan, at least ¥4trn per month or 12% over six months; in UK £50bn, or 13% over six months)”. In regard to the euro, “damage from ECB easing should be minor since eonia rates are already near zero and since balance sheet expansion through an LTRO3 is very unlikely”.