USD will soften this year - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that they expect the USD to soften this year due to their scepticism regarding the pace of Fed rate hikes. 

Key Quotes

“The DXY dollar index is currently trading little changed from the levels printed on March 15 when the Fed hiked rates by 25bps.  A rally in the DXY in late March through to early April has given way to a softer tone as the USD is undermined by a rally in the safe haven assets such as the JPY.  Geopolitical concerns appear to have lessened.  However, tension surrounding the Korean peninsula is set to keep the safe haven JPY and CHF on guard this week, suggesting only limited room for a USD recovery vs these currencies.”

“The USD may be better positioned to win back some ground vs the EUR due to uncertainty connected with the first round of the French Presidential election on April 23.  A high degree of French voters are still reportedly undecided meaning that this week’s election preparations are crucial.  CFTC data suggest that speculators have lessened their EUR shorts fairly dramatically since the end of last year and this could make the EUR vulnerable in the near-term.  That said if, as the polls suggest, Le Pen fails to win the Presidency after the second round of the election next month, we would expect relief to lift the EUR vs. the USD.  Our year-end forecast stands at EUR/USD1.10.” 

“A significant factor behind our expectation that the USD will soften this year is our scepticism regarding the pace of Fed rate hikes.  We are of the view that the Fed may struggle to announce more than one further rate hike this year.  Over the past couple of sessions, the implied odds of a June Fed rate hike have softened on the back of last week’s weak US CPI inflation and retail sales data and due to comments from Mnuchin.  While the data suggest that current pace of expansion in the US economy may have suffered a setback, delays in tax reform suggest that the market may have over-anticipated Trump’s reflationary policies.  The Treasury Secretary has admitted that the progress of tax reform will be impacted by the recent withdrawal of the healthcare reform and that an August timetable for tax reform now seems “highly aggressive to not realistic”.”