Risk-taking was back with a vengeance in the last couple of weeks of 2012 buoyed not just by improving US economic data, but also by the Fed’s decision to expand monetary policy stimulus, coupled with heightened expectations that Congress would come to an agreement to avert the fiscal cliff — which it eventually did at the eleventh hour.
Little surprise then that the US dollar ended the year on a rather soft note. But the world’s reserve currency has ample room for a rebound in the coming weeks. The two-month postponement of sequestration and the upcoming debt-ceiling debate promise some heated arguments in a hugely divided Congress, something that’s likely to rattle markets.
We’re accordingly sticking with our $1.23 end-of-Q1 target for the euro. Once risk aversion makes a comeback, expect attention to revert to the zone’s awful economic fundamentals. Also, speculators have recently turned bullish on the euro — positive net spec position for the first time since last summer — on the premise that the Federal Reserve would continue its Treasury purchase program indefinitely. Such bets may need to be pared down following the latest Fed minutes which showed that several FOMC members are wary of continuing QE after 2013.
The greenback’s likely rebound partly explains why we’re leaving unchanged our 1.04 USD/CAD end-of-Q1 target. The Canadian dollar is pricing an 80% probability of a rate hike by the Bank of Canada this year, something which we view as excessive given the further widening of the output gap after dismal economic growth last year.
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The USD Has Ample Room For A Rebound In The Near-Term
Published 01/14/2013, 02:30 AM
Updated 05/14/2017, 06:45 AM
The USD Has Ample Room For A Rebound In The Near-Term
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