The USD Has Rebound Potential

The US dollar has just had its best month since May 2012. While last May's concerns about the European sovereign debt crisis lifted the greenback, this time it was politics that prompted flows towards the world’s reserve currency. Congress failed to avert the automatic spending cuts, something which raised doubts about the US economic outlook this year. European politics also curbed investor enthusiasm with Italian elections yielding no clear winner and setting the stage for enhanced political instability, a clear negative for the euro. The greenback has room to run further given that European woes are far from over, and that other major central banks such as the Bank of Japan and the Bank of England remain in printing mode.

The loonie offered little resistence to the USD’s February push, with souring domestic economic data hammering the currency further. With the Canadian dollar sinking faster than we had expected, we have made some room to allow for further loonie depreciation over the near term, raising our USD/CAD Q3 target to 1.05. And with inflation data surprising to the downside, we’ve pushed by two quarters to 2014Q3 the timeline for when we expect the Bank of Canada to resume rate hikes. We have accordingly allowed for C$ weakness to persist for longer over our forecast horizon, expecting the loonie to remain on the weaker side of parity with USD through mid-2014.


US dollar finds support
The US dollar has potential for a rebound. That’s exactly what we got last month with the greenback soaring 3.5% on a trade-weighted basis, the biggest monthly advance since May 2012, with none of the other majors being spared by the USD’s rebound.

While last May concerns about the European sovereign debt crisis lifted the greenback, this time it was politics that prompted flows towards the world’s reserve currency. In the US, Congress failed to avert the sequester that started on March 1st, which immediately raised doubts about the economic outlook this year. European politics also curbed investor enthusiasm with Italian elections yielding no clear winner amid yet more concerns about whether Italy can stick to its austerity plan. Speculators increased their net USD longs to the highest since September 2012.

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