Buy the US dollar in 2016, big banks urge

The world’s top forex traders say the US dollar will appreciate next year. But gains against the Aussie dollar and the yuan will be the ones to watch out for.

Buy the dollar. Again. That is the message for next year from the biggest banks trading in the US$5.3-trillion-a-day currency market.

Deutsche Bank, the world’s second-largest currency trader in Euromoney rankings, says the dollar’s rally has plenty of room to run – another two years, and about 10 per cent on a trade-weighted basis. JPMorgan Chase says the dollar will strengthen versus the currencies of New Zealand and Singapore, peaking in the second half of next year. Goldman Sachs, Barclays and Credit Suisse are also bullish on the Federal Reserve raising interest rates for the first time in almost a decade. A decision on the interest rate was due last night.

“We expect broad dollar appreciation in 2016,” said Todd Elmer, a currency strategist in Singapore at Citigroup, which was first in the Euromoney rankings. “If the market moves to price in a steeper trajectory from the Fed, then that’s going to bring back the theme of cyclical and policy divergence between the US and other major economies.”

While the Bloomberg Dollar Spot Index has gained 9 per cent this year, following an 11 per cent advance in 2014, its ascent has been bumpy.

Analysts cut forecasts last quarter because of weaker-than-estimated US economic data and a slowdown in China. The dollar rally was reignited in October after Fed policymakers said US growth was robust.

Companies from Delta Air Lines to Whirlpool have already blamed a stronger dollar for hurting overseas sales.

With hedge funds and other large speculators holding bullish dollar futures positions close to an all-time high, the trade may be overcrowded and prone to reversal.

Buy US dollar, sell euro

Recommended by: Deutsche Bank, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse

Foreign-exchange markets were dominated this year by the idea that the US will boost rates in contrast with easing by the European Central Bank (ECB) and other global peers. As the Fed tightens, the greenback may climb to parity with the euro in the second quarter, according to 17 of more than 60 analysts surveyed.

After the ECB’s “disappointing” forward guidance on December 3, “policy ease will be held longer or be increased, meaning a deeper trough for euro-dollar,” Jose Wynne, the head of foreign-exchange research at Barclays in New York. He expects the dollar to strengthen to 95 cents per euro by the end of next year.

That is more bullish than the median estimate of $1.05 per euro by the end of next year, the survey showed. The greenback was at $1.092 per euro yesterday.

Buy US dollar, sell Australian dollar

Recommended by: Barclays, Morgan Stanley, BNP Paribas, Credit Suisse, Danske Bank

The Australian dollar will remain one of the weakest G-10 currencies next year, according to Hans Redeker, Morgan Stanley’s head of global foreign exchange strategy in London.

That is because “a rapidly changing Chinese economy, falling domestic terms of trade, weak competitiveness, shrinking rate differentials and external vulnerability” will drag down the currency.

The Aussie tumbled 12 per cent against the US dollar this year as Chinese demand for iron ore, Australia’s biggest export, slumped.

Buy US dollar, sell yen

Recommended by: UBS Group, BNP Paribas, Goldman Sachs, RBC Capital Markets

“The Japanese economy faces significant challenges, with the inflation target remaining elusive, and continuing negative GDP growth,” Daniel Waldman, the co-head of foreign exchange and rates strategy at UBS in New York, wrote in a December 10 report. Slowing exports may also drive the yen lower, he said.

Buying the dollar against the yen is the best way to make a bullish bet on rising US rates, according to Adam Cole, the head of G-10 foreign-exchange strategy in London at RBC.

Buy US dollar, sell offshore Chinese yuan

Recommended by: Bank of America, Barclays, Danske Bank

China’s yuan may depreciate as much as 10 per cent against the dollar next year as the US boosts borrowing costs, according to David Woo, the head of global rates and foreign exchange strategy at Bank of America in New York. His favourite trade is a six-month forward contract to buy the dollar and sell the offshore yuan.

China’s shock devaluation of the yuan in August was the “defining event” of this year, Mr Woo wrote on December 8. And now, “the US dollar-renminbi peg, a marriage of convenience that has been the anchor for the global growth model for the better part of the last 15 years, is headed for a divorce.”

The yuan declined the most since August in offshore trading on Friday as China published an index that values it against a broad range of currencies. The move by the China Foreign Exchange Trade System spurred speculation that policymakers want to reduce the currency’s link to the dollar and let it weaken further.

Sell euro, buy Swedish kroner

Recommended by: JPMorgan, Bank of America, BNP Paribas, RBC Capital Markets, Danske Bank

Banks do have other recommendations besides dollar trades.

Swedish economic data has exceeded forecasts more than any other G-10 nation, Bank of America analysts wrote on Friday.

That is going to set up the currency for a bounce next year.

“With Sweden posting solid growth numbers, excess capacity in the economy limited, and inflation likely to pick up next year, markets are likely to be increasingly sceptical of the Riksbank’s capacity to match ECB easing measures,” wrote BNP‘s Steven Saywell, the global head of foreign-exchange strategy in London.

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