Will the Greenback be carried by a Bird of Prey?
Conventional wisdom seems to indicate that the U.S. Dollar is headed for a softening. In fact, most currency analysts believe that the dollar’s rally is coming to an end. For that reason, it appears that most investors are already anticipating a slight pull-back and are positioning themselves to protect their profits.
However, there are some currency experts who are taking a contrarian position. One of those is Credit Agricole. This currency bank believes there is room for the Greenback to strengthen. While this may not be the predominant opinion among currency management companies, David Forrester, the bank’s FX strategist has made a persuasive argument for just such a case.
A Hawkish Fed…
Forrester believes that the markets are overly fixated on U.S. inflation data and currency pricing with an overly cautious Federal Reserve. He also thinks that the Fed will sharpen their talons to more aggressively protect (i.e. support) the Greenback.
To that end, Mr. Forrester is convinced that the Fed will surprise the markets with their hawkish approach. It is Credit Agricole’s belief that the Fed wants to, “…get its rates normalized so that it actually has room to cut rates in the next economic downturn.” Forrester has stated that he feels the Fed seems to have changed its policy response function to support that supposition.
“Let’s not forget here, the U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward,” says Forrester.
Another Rate Hike Taking Flight?
Credit Agricole has stated that they expect the Fed to hike rates at least one more time this year…followed by three times in 2018. When you consider that U.S. inflation is still below 2% even with a low unemployment rate, it makes for a strong argument that the Fed will continue to move towards normalizing interest rates.
Historically, the Fed made decisions regarding rate adjustments based on the current economic condition of the country. Rate hikes (or cuts) were driven by the immediate or foreseeable needs to stabilize currency and control inflation. Forrester believes the Fed is now taking a more futuristic approach to rate management.
In other words, his theory is the Fed is wanting to raise rates not so much because of the present-day effect it will have (although he believes it will be a good one)but because they want to build a buffer into the rates in case they need to cut them at a later date!
The Bottom Line…
Forrester’s, indeed Credit Agricole’s, views are in stark contrast to that of many currency analysts, who expect a trending weakness in the dollar. Experts like Ken Peng, Asia investment strategist at Citi Private Bank has said, “…the greenback is headed for a new cycle after a six-year rally since 2011.” He went on to say, “…dollar weakness will be one of the greatest market trends for global investors!”
At MosaicaFX, our job is to gather as much information and data as possible to allow our clients to make solid decisions regarding their currency goals. Having said that, we also take very seriously our desire to provide the best perspective we can to help our clients protect their profits.
Our overall position is that the jury is still out with regards to where the Greenback is headed. While conventional wisdom cannot be ignored, we also believe that Credit Agricole makes a somewhat convincing argument that the Fed will remain protectively hawkish regarding the U.S. Dollar.
Contact us today to discuss our more detailed information made readily available to our clients to support their currency goals. Our Executive Currency Managers will eagerly share our hedging strategies with you to protect your profits.