Dollar strength may not be done yet

 In Newsletter

Issue No. 106

Assets covered: USD/JPY, EUR/USD, USD/CNY
Countries covered: US, Japan, EU, China

 

The US dollar weakened in October as markets geared up for a Fed rate cut and worries built about weaker economic data. But our models, based on our systematic view of the global economy where each data point interacts with every other data point, are not forecasting long-term dollar weakness. In fact, we expect the greenback to perform well relative to other major currencies over the next few months.

 

That’s mainly due to the fact that other developed economies are loosening more than the US, and the American economy should be able to avoid a sharper slowdown in the near-term..

Japan is one example: despite recent gains against the dollar, our models have the Japanese yen weakening to levels last seen in April by the end of the year. Japan’s economic data remain stagnant – inflation is at a 29-month low – and the BoJ has indicated it is willing to cut rates further into negative territory.

USD-JPY exchange rate forecast through January 2020

USD-JPY exchange rate forecast through January 2020

This chart was generated using CI Futures. Book a demo to see it in action.

 

EUR/USD should also favor the dollar through the end of the year as eurozone economic growth remains soft and stimulus measures remain in place.

EUR-USD exchange rate forecast through January 2020

EUR-USD exchange rate forecast through January 2020

This chart was generated using CI Futures. Book a demo to see it in action.

 

One winner versus the USD over the next few months could be the Chinese yuan. We called the yuan’s summer weakness, but we also sniffed out the recent CNY gains with our October forecasts, which were made in late September (see below). Our current forecast has the yuan roughly treading water through the end of the year, then strengthening early in Q1.

USD-CNY exchange rate forecast through January 2020

USD-CNY exchange rate forecast through January 2020

This chart was generated using CI Futures. Book a demo to see it in action.

 

With a potential trade deal between the US and China and an election in the UK coming up, expect volatility in currency markets, but also don’t be surprised if the dollar prevails for now.