USD: The slide begins – HSBC

The research team at HSBC explains that retreating European political risk is a game-changer for FX markets as the USD is set to struggle with lingering political and structural worries.

Key Quotes

“We outline four main reasons we expect the USD to lose traction this year:

1)  Political switch: now USD negative and EUR positive. The French election should be the turning point for the EUR, with political risk set to fade. Meanwhile, high expectations about the US administration’s fiscal agenda could lead to disappointment.

2)  Cyclical drivers have upside risks for EUR, not for the USD. The market will now switch focus to an ECB exit – where the risk of a policy shock lies. By contrast, the prospect of a gradual tightening by the Fed is already priced in.

3)  A cyclical to structural shift regarding US fiscal focus. The cyclical upside of possible US fiscal stimulus may turn to structural concerns over the fiscal deficit. This would turn the USD implications of tax reform on its head from positive to negative.

4)  Structurally, the US wants a weaker USD. The emphasis on bilateral trade imbalances and the emphasis on a weaker USD will give prominence to twin deficits.”

“We believe there is a shift underway that points to USD weakness, notably but not exclusively against the EUR. The French elections provide the catalyst for the shift away from political negatives and towards structural and cyclical positives in Europe. The opposite is taking place in the US – a shift to more negative political and structural factors with limited cyclical upside.”

“Elsewhere, we now see USD-JPY falling to 100 by year-end, reflecting both USD weakness and a renewed recognition that Abenomics is not working. In addition, with the UK current account less of a worry than before we think the fall in GBP from here will be much more limited. By taking into account these changes, we have moderated our USD-CNY forecast to 7.10 from 7.20. Structural outflow pressures should see the CNY weaken steadily.”