Via HSBC on those arguing the USD is going to fall:
Argument 1) Fed rates are near the peak and are already priced in
What they say:
Rates may be moving closer to neutral, but this is not the same as the peak rate. Doubts remain about when and how quickly other central banks will raise rates. Also the level may matter not just the rate of change.
Argument 2) The US economy is set to slow, while Eurozone growth will pick up
What they say:
US growth estimates are being revised upwards, while the Eurozone needs growth to recover just to meet existing forecasts. Survey data in Eurozone remains challenging. The market seems to assume a Eurozone recovery but cannot explain the big growth miss so far in 2018.
Argument 3) Structural forces point to a weaker USD, overwhelming any cyclical support
What they say:
Eurozone has its structural frailties too, as Italy’s tribulations illustrate. Internal Eurozone imbalances are difficult to address. Fiscal issues can open the question of whether the EUR is divisible, while the USD is not.
Argument 4) EM FX is structurally sound and cheap, with USD weakness the flipside
What they say:
EM does not offer value and those that are ‘cheap’ reflect their risk profile. Foreigners still own much of the local market suggesting little clear out and therefore less scope for a rush back in. Macro frailties remain.
Argument 5) The USD has not rallied enough or at all given what should have been supportive developments – this shows it is already expensive
What they say:
The USD has continued to rally on a broader basis, even if this is not fully captured by the DXY. The USD is not expensive on our metrics, and has room to catch-up with these developments.
They say the AUD will fall to 0.68 cents before the end of 2019 as the USD rallies. Seems about right to me. Trade War 2.0 is very serious headwind but the bottom won’t fall out of the AUD while China is stimulating ever more building even if the negative yield spread is turning into a yawning gulf.
David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book (or HSBC is!). Below is the performance of the MB Fund since inception:
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