Implementation of new regulation, beginning normalisation of monetary policy in the US and an increase in deposits on the US treasury account at the Federal Reserve has reduced the US monetary base since 2015.
That has contributed to keeping the USD spot rate elevated relative to fundamental factors and led to the widening of the USD basis in, for example, EUR/USD FX forwards.
We forecast the Federal Reserve will raise the Federal funds rate twice in 2017. Two additional rate hikes next year is likely to put less of a strain on the monetary base, while additional regulation may force it lower.
This will continue to weigh on USD FX forward points vis-a-vis the EUR and the Scandinavian currencies to a larger extent than can be explained by the wider interest rate spread.
We look for an additional USD rise against EUR and the Scandinavian currencies on 1M and recommend clients to use this move to hedge USD assets and USD receivables in FX forwards.
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