USD: Despite recent stumble, outlook remains constructive - Scotiabank

Shaun Osborne, Research Analyst at Scotiabank, suggests that the uneven global growth, diverging monetary policy risks, softer commodity prices and the ongoing fallout from the UK referendum are likely to be the key drivers of movement among the major currencies over the course of August.

Key Quotes

“The US dollar (USD) has performed well in general since basing in May and we expect it to strengthen somewhat over the balance of the year as it remains a more compelling fundamental prospect than many other major currencies.

We retain a year-end forecast of USD1.05 for the euro (EUR) and expect the spillover over from Brexit to help EURUSD fall to that target. Eurozone growth will slow modestly in response to Brexit, at least, and may entail additional accommodation from the European Central Bank in September, once its staff has had an opportunity to review more fully the impact of the growth outlook on inflation.

Short-term Euro zone/US interest rate differentials are already at punishing levels for the EUR (+130bps premium for the USD) and our regression modelling suggests that the spot rate should already be significantly lower than it is (near 1.08) in response. There is little prospect of the EUR recovering on a sustained basis under current circumstances and gains towards 1.1250 should attract selling interest.

We look for USD to remain broadly stable versus the yen (JPY) through the balance of this year (we forecast a year-end rate of JPY105).”