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Nomura Turn Bearish on US Dollar Exchange Rate's Near-Term Outlook

By Rob Samson

us dollar exchange rate complex

The US dollar exchange rate complex (USD) is stabilising following on from two difficult weeks.

Update: Nomura have this afternoon urged caution on US dollar in the near-term. The following sums up a decidedly more bearish approach adopted by investment bank Nomura towards the US dollar:

"The weaker US data, increased uncertainty about the outlook for US monetary policy, a high bar in terms of US growth expectations for 2014, and more stable risk markets, are all factors that could weight on the dollar in the near-term.

"In addition, the almost 10% rise in crude oil prices since the low in January (based on WTI) bears watching given the dollar's historically negative correlation to oil dynamics."

The dollar was shaken lower on Fri in the wake of the disappointing headline nonfarm reading payroll (NFP) of +113k while the JPY also underperformed across the board as risk appetite levels improved.

A look at the key US dollar exchange rates on Monday shows markets to be rangebound this morning:

  • The pound sterling to US dollar exchange rate is 0.13 pct lower on Friday's close at 1.6390.
  • The euro to US dollar exchange rate is 0.01 pct lower at 1.3635.
  • The Australian dollar to US dollar rate is 0.33 pct lower at 0.8930.
  • The Canadian to US dollar is 0.07 pct higher at 1.1041.

Note: All USD quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Outlook for US dollar dominated by Fed's Yellen

Dominating the outlook for the US dollar this week is Fed chair Janet Yellen’s Congressional testimony this week (Tue and Thu) is expected to be parsed for further monetary policy cues.

"On the front, the dollar may continue to find few allies if Yellen remains sufficiently tempered in her policy posture, potentially by making the Fed’s forward guidance more pliable," says Emmanuel Ng at OCBC Bank.

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US interest rates will be key once again

What will determine the outlook for the US dollar? According to analyst Geoffrey Yu at UBS interest rate differentials will once again be key to determining USD levels:

"Looking beyond the intra-day price reaction, given the Fed's role as the source provider of marginal liquidity, we expect the relationship between G10 dollar pairs and US rates to return to the driving seat.

"Here we stress that the performance betas so far this year continue to diverge sharply compared to Q4 2013. With the exception of USDCHF and USDJPY, all other dollar pairs have sharply reduced sensitivity to higher US 10-year yields.

"In the case of GBP, NZD and AUD versus the greenback, it is starting to work the other way, though largely because of idiosyncratic factors in home markets.

"In particular, given the uptick in Australian data and the RBNZ's hawkishness, 'risk on' would propel these currencies even more. The Nordic currencies have a lot less going for them, but the positioning clear-out over the past few months has limited their general sensitivity to changes in the tapering outlook."

Keep an eye on US employment

Friday saw the release of the latest instalment to the Non-Farm Payroll series, and the outcome was rather disappointing.

The pace of payroll growth remains weak, there were offsetting factors in a much larger rise in employment in the household survey and a consequent further decline in the unemployment rate.

"The data consequently doesn’t change much and our view of the prospects for Fed policy is unchanged. Nevertheless, it now seems even more likely that there is no change in the pace of Fed tapering, and if anything the danger is slightly more towards a pause in tapering than an acceleration if the next set of numbers disappoints," says a note issued by Lloyds Bank Research.

The chance of a significant move in the US Dollar exchange rate complex in general consequently seems quite low suggest Lloyds, but the USD may be vulnerable against those currencies where there is still long USD positioning, notably the AUD and CAD, or the JPY if risk appetite turns more negative.

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