USD stronger for longer – Nordea Markets

The debt ceiling suspension and the escalated trade war, make the Nordea Market Research Team revise their US Dollar forecast in a stronger-for-longer direction. They see that a weak risk appetite is set to remain through the second half of 2019.

Key Quotes: 

“The Fed announced an earlier end to QT (the reduction of bond holdings), which is obviously a slight liquidity relief, but it will not matter a lot in the short term as the US Treasury will withdraw liquidity as part of rebuilding the liquidity buffer after the debt ceiling suspension that was signed recently. The Treasury will rebuild the cash buffer from 125bn to the range of 350-400bn. Liquidity will be withdrawn from commercial banks. Usually something that leads to weaker risk appetite, a firmer USD, wider USDLibor/OIS and lower treasury yields.”

“The huge drop in interest rates (e.g. from 3.30% to <1.70% in the 10yr Treasury yield) will likely be helpful in providing the global economy with a renewed boost in the second half of 2020 at the latest, which could help re-fuel the reflationary growth story. This could be a positive game changer for EURUSD, but not until we have moved (even) lower than current spot levels during the remainder of 2019.”

“Our new forecast reflects that currencies with a positive Beta to world trade will continue to struggle for the rest of 2019. Slowing world trade is usually a problem for CAD, AUD, GBP and NZD (and also partly for Scandis). USD, CHF, EUR and JPY will on the other hand stand strong.”