– Consensus supports USD weakness
– Despite a decent start until 2021
– RBC Capital and Bank of America see dollar stronger this year
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Despite being the best-performing major currency last week and being a G10 average this year, currency analysts remain steadfast in their view that 2021 will be a year of decline for the currency.
“For the fourth year in a row, analysts began forecasting 2021 with an overarching theme of the weak US dollar. Price action has so far challenged this view, with the dollar stable at more high compared to most majors and anecdotal evidence suggests that the consensus may be starting to falter. ” says Adam Cole, chief currency strategist at RBC Capital Markets.
The dollar was pushed by the majority of the analyst community to fall over the next few months as the US and global economies regained their feet and began to recover from the covid-19 crisis, creating the kind of conditions which generally correspond to the weakness of the dollar.
However, a rise in US yields in recent weeks created demand for the greenback that thwarted consensus. In addition, the timing of the first rate hike by the US Federal Reserve has been brought forward especially in recent weeks, which further added the dollar.
Indeed, the euro-dollar exchange rate is up 1.0% in 2021 and the US currency has recorded gains against the crown, the franc and the yen. The dollar’s biggest underperformance comes amid the resurgence of the pound, with the pound-to-dollar exchange rate down 2.20% year-on-year so far.
However, Cole’s research suggests that the consensus among the analyst community remains against the dollar and “we are still in a very small minority looking for moderate gains from the USD this year.”
Image courtesy of RBC Capital Markets.
The chart shows a calendar deviation of analysts’ forecasts for the USD against major currencies (Bloomberg consensus) – the difference between the short term (usually around 3m) and the long term (around 12m) on a This metric is less volatile than comparing consensus to the spot and we think it gives a better sense of sentiment even when the spot deviates from the published forecast, ”says Cole.
Cole notes that since the volatility around the start of the pandemic, very little has changed, with a consensus characterized by a steady decline in the USD across the board. This may in part reflect the stubbornness of strategists on the seller side.
“But investor positioning metrics also show significant seller bias in USD. IMM data and our proprietary positioning indicators show USD shorts still extended, although both have been reduced somewhat from the extremes,” says -he.
RBC Capital Markets continues to believe that some of the reasoning behind the negative view of the dollar does not stand up to scrutiny (the role of real rates, the likelihood that global growth will catch up with that of the United States, etc.) .
“Our forecast indicates that the USD is stronger overall in 2021, but at a more moderate pace than the 1.5% gain (in DXY terms) seen in the first two months of the year,” says Cole.
in the meantime Bank of America told their clients they see the dollar appreciating in 2021, arguing that the revaluation of global rate markets on a divergent economic outlook is emerging as a key source of support for the US dollar.
“We expect this process to continue as the extent of the Fed’s relative normalization increases and the timeline gets closer,” said Ben Randol, analyst at Bank of America.
He predicts that a troughing process will unfold as capital flows and positioning changes precipitate the appreciation of the US dollar in 2021.
“A steeper and closer path to normalization by the Fed versus global central banks is beginning to support the US dollar overall, according to our analysis. This evidence supports our bullish thesis on the USD,” says Randol.
GBP / USD forecast 2021
Period: Full year 2021
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