The fluctuation in the value of the US dollar in recent months has been driven primarily by the market’s expectation of a more accommodative monetary policy stance on the part of the Federal Reserve.
Analysts at HSBC believe the currency has been pushed to a level too weak for these expectations.
US Dollar Forecast:
Undoubtedly, the sharp decline in the US dollar has been a source of frustration for those holding long positions. However, analysts at HSBC believe that the market has overreacted to the possibility of the Federal Reserve making strong rate cuts.
Even if the market’s current expectations of a 100 basis point rate cut by the end of the year come true, they see the US dollar undervalued at its current level.
Market sentiment is heavily tilted towards the possibility of a significant rate easing by the Federal Reserve, a scenario that HSBC analysts consider exaggerated.
US macroeconomic indicators do not point to an impending recession, and the prospect of a 50 basis point rate cut, let alone a 100 basis point cut, seems unreasonable in a scenario in which the economy achieves a soft fall.
“The situation of the two together, and the fact that the US dollar index has returned to its December 2023 lows, gives us reasons to be optimistic about the US dollar,” analysts said.
If the Fed’s actions are interpreted as a sign of economic stability rather than caution, it could reinforce a ‘risk’ environment, benefiting risk-sensitive currencies such as the Australian dollar.
Conversely, if lower interest rate cuts are seen as a response to persistent inflation and a tight labor market, there could be a ‘risk-averse’ scenario, which could put pressure on currencies such as the pound sterling and the Canadian dollar.
In light of this, HSBC analysts recommend opening a long position on USDCHF at 0.8490, targeting 0.8740 with a stop order at 0.8390.
The Swiss franc (CHF) has risen significantly, surpassing yield spreads and showing signs of excessive stretching.
With Swiss inflation falling below expectations, the Swiss National Bank (SNB) may have limited patience with further appreciation of the Swiss franc.
Given that both the US dollar and the Swiss franc are safe havens, this deal provides a way to overcome the uncertainty associated with the Fed’s policy shifts while reducing risk exposure.
Euro forecast:
The EURUSD currency pair rose, driven by the market’s aversion to the dollar more than the inherent strength of the euro.
However, with the European Central Bank (ECB) already pricing in strong interest rate cuts, the prospect of further gains for the euro seems limited.
“The market was fully priced to cut the interest rate by 25 basis points at the September meeting, which is a view we support,” analysts said.
There’s no obvious mispricing here. But the market has another 15 basis points priced for the October meeting, and about 70 basis points in total for the second half of 24, indicating a high probability that the ECB will cut at each of the remaining three meetings this year.
Despite ongoing inflationary pressures and rising wages, the ECB is unlikely to exceed current market expectations with more cautious measures.
Weak growth in the eurozone, combined with flat inflation, also reduces the euro’s attractiveness.
HSBC analysts also expect EURUSD to trade sideways in the 1.1000-1.1276 range in the near term, noting that the currency lacks a strong catalyst for further growth.
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GBP forecast:
The strong performance of the pound sterling this year can be attributed to higher interest rates compared to other currencies.
However, HSBC analysts believe that this strength now seems overvalued compared to interest rates, making the currency heavily dependent on global risk sentiment.
The pound seems overvalued, especially against the US dollar when considering interest rate differentials.
The currency could face significant challenges if expectations of a US interest rate cut are scaled back, dampening global risk appetite.
Moreover, the recent movements of the pound sterling closely reflected trends in global stock markets.
If risk appetite declines, the GBP/USD pair could see a significant decline, especially as it struggles to maintain levels above 1.30.
Japanese Yen Forecast:
The USDJPY pair has undergone a notable downward adjustment, which HSBC analysts believe has now taken its course.
The pair’s decline has brought it back in line with interest rate differentials, reducing the likelihood of further decline.
JPY/USD remains closely correlated with interest rate differentials, and with the pair now in line better with these rates, the likelihood of further declines seems limited.
The market situation has also shifted from net short positions to net JPY long positions, indicating a neutral position.
While recent volatility has weighed on Japanese retail investors and life insurance companies, HSBC analysts expect further limited declines and see the potential for a moderate recovery of the US dollar against the yen.
Norwegian Krone and Swedish Krona:
Both the Norwegian Krone (NOK) and the Swedish Krona (SEK) saw volatility driven largely by central bank actions and global risk sentiment.
For the Norwegian krone, HSBC analysts expect the Norwegian krone currency pair against the US dollar to continue trading within a certain range unless Norges Bank adopts
As for the Swedish krona, its recent outperformance seems to be somewhat detached from the central bank’s cautious tone. Going forward, domestic data and inflation reports will play a crucial role in determining whether the Swedish krone can maintain its strength.
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