USD: Patiently waiting to flip the weak switch back on - ING

Global FX markets are currently straddling one of two worlds – either the USD weakens against all other currencies or the USD strengthens against all other currencies, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“The lack of a middle ground – and synchronised nature of currency movements – should be enough to tell us that exchange rates are by and large being driven by a set of (US-related) common factors. Though we would argue that current USD strength is nothing more than a squeeze in crowded short positions, let’s entertain the idea that there has been a sudden re-appraisal of the bearish dynamics that have weighed on the USD in recent months. This in our view requires investors making sweeping changes to 2 broad assumptions:

(1) the synchronised global growth story and the RoW playing catch-up to a late-cycle US economy;

or (2) the nature of US trade and foreign policy risks.”

“While what the White House does next remains unpredictable, it’s clear that some of the global animal spirits that were in place at the turn of the year have dissipated – with Trumpian trade and geopolitical uncertainty oddly having a greater dampening effect on business confidence outside of the US. Therefore for currency markets to re-couple with the idea of a weaker USD in the short-term, we will need to see some evidence that the strong growth story in places like Europe and Asia is not completely lost.”

“Equally, we wouldn’t rule out a pick-up in US political uncertainty that reaffirms the idea that USD assets should be trading with a risk premium. Either way, it’s worth remembering these are just cyclical factors which are subject to short-term fluctuations. Bigger US budget and current account deficits means that the textbook case for a weaker dollar remains in place. We just need something to flip this weak USD switch back on.”