USD: The worst G10 performer in H1 – Rabobank


The USD was the worst performing G10 currency in H1 2017 and in view of Jane Foley, Senior FX Strategist at Rabobank, fears of a reduction in monetary accommodation in other parts of the G10 is threatening to leave the USD on the back foot heading into H2.

Key Quotes

“In the first half of 2017, the USD was the worst performing G10 currency.  The soggy tone of the greenback can be linked with a reduction in hope for US fiscal reform, a spate of disappointing US economic data and increased market scepticism as to whether the Fed will be able to announce a third rate hike by the end of this year.”

“In recent months we have argued that the rotation out of long USD positions is also a function of the coincident improvement in European fundamentals which has sucked funds back into the EUR.  More recently the outlook for the greenback has suffered another setback as investors started to weigh up the likelihood of central banks such as the BoE and the BoC reducing monetary policy accommodation.  ‘Hawkish’ comments from various central bankers this week led to market volatility which has been described by several commentators as a mini ‘taper tantrum’.”  

“The coincident deterioration in USD fundamentals relative to market expectations this year and resultant move higher in EUR/USD has this week been showing little signs of slowing.  An attempt by ‘ECB sources’ to explain Draghi’s remarks as ‘balanced’ rather than hawkish failed to have any lasting impact in containing the rise in the EUR/USD which earlier this week hits its highest level since May 2016.”

“EUR bolstered by better fundamentals

  • It was always our expectation that EUR/USD would end this year at higher levels than where it started.  This was based on our perception that Trump related US reflationary hopes would be disappointed and that Eurozone political concerns would be subdued after the French election.  That said, a month or two ago the uptrend in EUR/USD forced us to revise higher our 12 month forecast for EUR/USD which now stands at 1.17.  The EUR has been bolstered not just by a reduction in Eurozone political risk but by an improvement in economic data in the region that the market was not priced for at the start of the year.
  • The May measure of US core PCE inflation printed a modest 1.4% y/y rise.  It is our view that with inflation still a long way from the 2% region that the Fed will decline from hiking interest rates again this year, in spite of its forward guidance which pencils in another move.  This view has had a strong bearing on our soggy USD forecast for 2017.  Recent movements in US bond yields implies that this outlook has been gaining traction in the market.  Despite a strong labour market, US wage inflation remains slack and this can be linked with the moderate level of price pressures.”

But, where is the inflation?

Despite the better than expected pace of world growth this year, core inflationary pressures in the G10 remain essentially subdued.  In this environment, the pace at which central banks reduce monetary policy accommodation is set to be slow and considered.  For the FX markets this should help to contain volatility and limit the size and incidence of any further taper tantrums going forward.  That said, disappointment over the pace of reflation in the US and the coincident improved growth prospects in Canada and most of Europe should still leave the USD on the back foot going into the second half of the year.”


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