TD Securities: the dollar is about to end, the euro is capped at 1.2200
TD Securities (TD) believes that the dollar could withstand further losses in the short term, especially given the current market position, although it remains cautious about upside opportunities. According to TD; “We think we are nearing the end of the recent drop in the US dollar, but not the beginning of a bull market.”
TD believes that higher real interest rates, greater volatility and stagnation in the narrative of global reflation will be critical to reverse the current surge in dollar losses and lead to a more significant depreciation of the euro-dollar exchange rate (EUR / USD).
He adds; “EURUSD is likely to high again near the key 1.22 level.”
Increased caution when selling US dollars
TD marks recent currency losses in the US and the markets have created a significant short dollar position in the global foreign exchange markets. According to the bank, these short positions pushed the currency beyond the estimated fair value.
An important aspect of this is that the markets have also been actively promoting global reflationary trades over the past few weeks. Selling dollars and buying stocks was an essential aspect of this, but TD believes this step may have gone too far; “As a result, both positioning and valuation indicate some froth in the foreign exchange market.”
TD also expects the markets to take a more cautious stance over the next few weeks, especially given the serious summer risks.
The US currency will tend to recover if there is a weaker performance in the stock markets.
In particular, there will be fears that the Federal Reserve will adopt a slightly more aggressive policy, which will limit the potential for further dollar sales with a recovery in US yields.
“We think the markets are likely to start cutting short US dollar positions in summer high-risk events such as the June FOMC meeting.”
Global resistance to rising exchange rates
TD also notes that the dollar does not act in isolation in global foreign exchange markets and that other currencies need to strengthen in order for the dollar to weaken. The bank, however, expects two key global authorities to show strong resistance to the currency’s appreciation.
First, TD expects Chinese authorities to put up strong resistance to the yuan’s rally; “Chinese politicians decided that they saw a fairly strong yuan at this point in an effort to create more bilateral risks.”
TD also expects the ECB to resist a rally in the euro given the need to maintain favorable funding conditions. In this context, the last political meeting will be an important factor on Thursday.
“It is also unlikely that the ECB will seek to attract more euros and we think they will disappoint the hawks this week.”
If there is stronger resistance to the rally in the euro and the Chinese yuan, the scope for general dollar losses will be significantly less, especially for the EUR / USD pair.