Dollar likely to continue heading north – SocGen

Research Team at Societe Generale, suggests that their residual bullish dollar view can be explained by five factors.

Key Quotes

“Our economists are still looking for one Fed hike this year (if only after the November election) and three next year. There is currently less than 1.5 Fed hikes priced over the next 18 months; pricing cannot turn more dovish than that unless the US economy comes to a standstill, which is not our forecast.

Positioning now looks more USD-friendly. Unless the Fed starts to talk up rate cuts, it is hard to believe that position adjustments will continue to hurt the USD.

The politics. It is easy to argue that politics will be a negative for USD in H2, but we are not quite sure. US political uncertainty is arguably large ahead of the presidential election. This may hurt US growth in the near term, but hasn’t that been priced in already. The rise of the anti-euro and anti-establishment forces is a drag for the euro and the whole European currency bloc.

Mixed commodity views into end-2017. Our commodity analysts remain bullish on oil prices over the long run (12-24 months) but are rather neutral into year-end. Real commodity prices (i.e. deflated by export unit values of major countries) are not cheap by long-term historical standards, suggesting limited upside potential amid a weak global growth environment (barring durable supply disruptions). Thus, a major driver of dollar weakness will tire in H2.

China risk. Emerging markets make up a very diverse universe, but better Chinese data in H1 (hard landing fears peaked in the first two months of 2016) clearly contributed to improving sentiment and pushing USD/EM sharply lower. The Chinese mini-recovery however was based on yet another lending binge. This cannot be sustained and our economists see Chinese growth risks skewed to the downside in H2.”