USD bottomed and will strengthen near tearm - Danske

According to analysts from Danske Bank, the collapse of the US dollar on May 3rd and the following reversal marked the end of the downtrend.

Key Quotes:

“The collapse in the USD on Tuesday 3 May and the sharp reversal marked the end of the USD down-trend, in our view. Typically, sharp reversals from extended moves mark the end of a trend and we think that was the case this time.”

“Interestingly, the USD reversal has come at the same time as US data has been soft, US rates have headed lower and risk appetite is fading. While the market in late 2014 and early 2015 bought the USD as an asset currency, those dynamics are gradually changing as global growth is converging. From the market being extreme USD bulls at end-2015, it has shifted to become very USD bearish, with major newswires flagging the USD downtrend and IMM positioning showing that the market is now short the USD for the first time since May 2014.”

“We believe that the USD has bottomed – for now – particularly versus European currencies where Brexit risks will weigh on sentiment. Still, we acknowledge that there is not much room for US Treasury yields to rise given still mixed US data and the wide differential between US and other safe-haven yields, particularly at the long end of the curve.”

“In addition, it may be difficult to get a significant re-pricing of the Fed with the June meeting being only eight days before the UK’s EU referendum. It will probably also be difficult for core euro yields to sell-off with the Brexit vote moving closer while ultra-long issuance, which has been weighing on markets in late April, is likely to slow down."