Currencies | May 11 2011
– Sentiment overwhelmingly negative for US dollar
– ANZ sees some similarities to 1995
– Cautions against assuming the trend will continue
By Chris Shaw
Soft US economic data and the Federal Reserve's willingness to leave significant liquidity in the system offer reasons for the US dollar being out of favour in global forex markets. But according to ANZ Banking Group, the current near universal sentiment could potentially be at a dangerous stage.
The bank's head of technical analysis, Tim Riddell, suggests views on the US dollar are approaching levels seen in 1995, when the greenback was similarly out of favour. The question for Riddell is whether USD weakness will remain a structural theme or whether a US dollar rebound is about to occur.
Recent comments from Ben Bernanke have left the market confident in the view Fed policy will remain highly accommodating for some time, which has prompted a rush in “risk-on” trades. This has in turn driven up asset and commodity prices, which is helping push emerging economy currencies higher.
Given the global economy is materially different to what it was 15 years ago, Riddell notes the current anti-US dollar stance in markets is not exactly the same as in 1995. China is a much larger economic force, while the GFC has resulted in unprecedented policy action and recovery paths.
The consequences of this are unknown according to Riddell, which reinforces the view the US dollar predicament at present and that of 1995 cannot be directly compared.
A number of conditions are similar, such as changed sentiment towards the yen following earthquakes (Tohoku this year, Kobe in 1995), US assets are seen at risk of liquidation from huge Asian central bank holdings and Europe is recovering from a crisis of confidence that threatens the common currency structure.
Current conditions have driven vehement anti US-dollar sentiment in Riddell's view, to the extent it now appears ingrained in the market's psyche. But while the rationale for selling the greenback was and is valid, the level of market action at some point risks becoming overdone.
As Riddell points out, long-term trends always look likely to extend when they approach a turn. This is especially the case when the trend has been dynamic as it has been with current US dollar weakness.
The current risk appetite frenzy could be impaired by policy tightening across Asia, which would have the effect of moderating economic growth. Recent shifts lower in both commodities and equities may prove to be interim moves, but as Riddell notes they could also be a signal for the end of current US dollar weakness.
Rather than increasingly position for further weakness in the greenback, Riddell suggests a more prudent course would be to seek some protection against a possible reversal in the currency's current trend.
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