FX forecasts and associated rankings are published on behalf of Monex Europe and Monex Canada.
Monex’s expectation of US dollar depreciation for May fared well in Reuters poll rankings, with firming results for majors like the euro, the yen, Nordic currencies and a wide array of EM currencies.
Our calls for a weaker dollar have been supported by the Fed’s accommodative stance filtering through into market pricing despite notable improvement in inflation data and forward-looking indicators of real activity.
The contrasting slow recovery in the labour market has seen some paring back of previous upbeat expectations, pushing the dollar slightly lower than what we had expected. We continue to foresee additional dollar losses across several currencies in the following months, as the supportive fiscal environment combined with a loose Fed set the tone for continued dollar depreciation. However, considering the larger-than-expected dollar depreciation so far, we are cautious about the extent of dollar downside looking ahead. As markets sit on the edge of any hints that the Fed might start tapering bond purchases later this year, we believe any sustained dollar decline should be limited by speculation over Fed normalisation. This narrative should be particularly dominant in currency pairs of advanced economies, where vaccine rollout and reopening plans have been largely priced in already. Conversely, further exchange rate volatility in the EM space should focus on idiosyncratic factors as the USD downtrend smooths out.
We continued to perform well in the G10 rankings, with improved results in our short-term forecasts joining our long-lasting strong rankings in our structural calls.
In particular, our yearlong conviction on EURUSD has yielded exceptional returns, as we sustained our conservative view on the currency rally compared with the consensus.
We also highlight the success in our calls for both Nordic and Antipodean currencies, as we account for expectations on monetary normalisation and higher commodity prices on the back of rapid economic recovery. We have also ranked well for safe haven currencies like JPY and CHF as the team looks deeper into their macro fundamentals amid an environment of reduced risk.
The emergence of inflation has also been a dominating story in EM economies, leading to central banks starting to strike a more aggressive tone in favour of monetary tightening.
Rising rates in developing markets have yielded positive signs for EM FX as foreign investors start hunting for yield.
LATAM currencies, in particular, have seen a substantial rally on the back of this theme. Looking ahead, domestic economic and political challenges should take centre stage in EM currency outlooks, especially amid a background of a plateauing US dollar decline in the second half of the year.
Author: Olivia Alvarez Mendez, FX Market Analyst