Tighter US credit conditions make a US recession, a deeper US Fed Reserve easing cycle and a weaker dollar all more likely.
However, I continue to favour the dollar bear trend really taking hold in the second half. Before then I have the small matters of a US banking crisis and a possible US Treasury default. The next couple of months could be volatile for the dollar.
EUR/USD: The bumpy path to a higher EUR/USD
Based on the view that the Fed tightening cycle is over and that a credit crunch makes a US recession more likely, I believe the dollar is about to embark on a multi-quarter (if not multi-year) decline. The bulk of that dollar decline may come in 2H23 as the US disinflation story builds and the Fed front-loads easing with 100bp of cuts in 4Q23. That could see the EUR/USD at 1.20 end year.
The path toward a weakening dollar may encounter obstacles along the way. The primary concerns revolve around the impending US banking crisis and the potential for a US Treasury default during the June/July timeframe.
It is worth noting that historical trends indicate that stress in US money markets often leads to a temporary surge in the value of the dollar.
As a dollar bear, I find the performance of USD/JPY to be consistently disappointing. The risk environment has not deteriorated sufficiently, nor has US disinflation shown significant strength to cause a sharp decline in USD/JPY.
However, the current US credit crunch increases the likelihood of a recession, leading me to firmly believe that USD/JPY will experience a substantial decrease in value by the end of this year.
Following new BoJ Governor Kazuo Ueda’s initial policy meeting, USD/JPY experienced a rally in Japan. This was attributed to the announcement of an 18-month policy review.
However, I believe that there is an underestimated risk that the BoJ might initiate policy normalization during its upcoming meeting on 16 June.
Currency market commentary and analysis from Luca Santos, currency analyst ACY Securities
