According to analysts at HSBC, there are five key counter-arguments to the bearish-USD market perspective currently at work.
Key highlights
- Bearish USD argument 1 - Fed rates are near the peak and are already priced in.
Rates are currently moving closer towards neutral, but this is not the same as reaching peak rate, and it's unclear both when and how quickly other central banks will begin lifting their comparative interest rates.
- Bearish USD argument 2 - The US economy is set to slow, while Eurozone growth will pick up.
US growth estimates continue to be revised to the upside, rather than down, while Eurozone growth is currently failing to meet forecasts as it is; markets are assuming a Eurozone recovery, but no explanation is forthcoming for 2018's big miss, which is still running.
- Bearish USD argument 3 - Structural forces point to a weaker USD, overwhelming any cyclical support from higher interest rates.
The Eurozone is also exposed to its own structural weaknesses, with Italy's current tribulations highlighting the imbalances within the EU's own market system.
- Bearish USD argument 4 – Emerging markets FX is structurally sound and cheap, with USD weakness the flipside.
Emerging markets don't offer as much value as they are currently perceived to, with macro frailties still baked in with most demand remand within domestic markets.
- Bearish USD argument 5 - The USD has not rallied enough or at all given what should have been supportive developments – this shows it is already expensive.
The US Dollar continues to rally broad-base despite a lack of buildup in the Dollar index, and the Greenback could easily have plenty of more room to run.
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