Delta variant is a boon for the US dollar, says Credit Suisse
– The USD is no longer just about yield
– The refuge offers are back
– The Delta variant is a key factor in investor anxiety
– Falling oil prices benefit the USD
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Dollar finds support amid renewed investor worries about medium-term global growth, new research suggests those watching the currency will have more than the United States Federal Reserve and inflation expectations to be taken into account.
The US Federal Reserve’s “hawkish” turn at its June policy meeting is declared by Swiss credit be a driver of the US dollar’s mid-year outperformance, but so too has the rise of the Delta variant of Covid-19.
Currency researchers at Credit Suisse say the dollar is now likely benefiting from investor demand for “safe-haven” assets, as US bond markets have not been very successful in recent times.
“A number of more broadly negative risk factors could help interpret the dollar’s strength in terms of ‘safe haven’, indicating investor concerns about a less constructive medium-term growth outlook,” Shahab Jalinoos said. , Global Head of Currency Strategy at Credit. Swiss.
The change in interest rate expectations in the United States – the Fed now views interest rates as probable in 2023 compared to 2024 – is widely cited by analysts as being behind the increased demand for the dollar, widely reflected in this publication.
It is understood that expectations of higher rates in the United States offer higher yields on bonds, which in turn attracts the interest of foreign investors, thus supporting the dollar.
But the data shows that US yields have fallen since the Fed meeting, which hardly supports the story of the dollar’s appreciation:
Above: USD and US real yields have moved in opposite directions in recent weeks. Image courtesy of Credit Suisse.
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Credit Suisse observes that the shift in interest rate differentials in favor of the USD has not continued.
“Seen in this context, the resilience of the USD seems less at odds with the traditionally negative USD price action associated with falling US nominal yields,” Jalinoos said.
The pound-to-dollar exchange rate (GBP / USD) has been declining since peaking at 1.42 in early June and is listed at 1.3797.
The Euro-Dollar rate is witnessing a similar pattern of short-term depreciation consistent with a strengthening of the dollar and stands at 1.1817.
Observing the resilience of the US dollar, in the absence of yield support, Jalinoos said “something different could be brewing”.
GBP / USD forecast 2021
Period: Q2 2021
FX Guide for Businesses
The analyst says investor concerns about less constructive medium-term growth prospects are emerging.
One of the areas of concern is the spread of the Delta variant of Covid-19, a more transmissible variant which means the herd immunity threshold is potentially higher than current vaccination targets.
This is illustrated by Israel where cases are increasing despite the fact that 65% of the entire population is vaccinated.
The UK is experiencing a third wave of infections although it has now given at least one dose to 66% of the population.
The UK is experiencing an exponential growth in cases which have seen Prime Minister Boris Johnson warn that 50,000 new positive cases daily could be reported in the coming weeks, a figure estimated at 100,000 by Health Secretary Sajid Javid.
While such an epidemic can occur in a highly vaccinated population like that of the UK, it can almost certainly turn out to be more severe in populations where vaccine penetration rates are lower.
Above: UK Covid case (black) vs death (red). Image courtesy of NBF Economics.
As the still low level of hospital admissions opposes a major deterioration in growth expectations, markets may view this development as supporting the idea that some Covid restrictions may persist longer even amid high rates of growth. ‘very high inoculation, in countries that showed a greater tolerance for blockages,’ explains Jalinoos.
Credit Suisse identifies softer Chinese data, linked to the Delta variant, as a potential additional contributor to investor concerns.
They note that Caixin’s non-manufacturing PMI data in China released on July 5 showed a sharp decline in growth in the service sector, largely attributed to a Delta-variant Covid-19 outbreak in the Guangdong region.
A drop in oil prices over the past 24 hours is also identified by Credit Suisse as a negative factor for commodity currencies; just look at the performance of the canadian dollar.
the OPEC bickers over production levels are identified as the main driver of recent increases and subsequent declines in the value of crude; if further weakness were to ensue, the dollar would inevitably be a beneficiary.
“While the dollar’s initial rebound from mid-June lows can be easily attributed to the hawkish turn in US monetary policy expectations, the more recent price movement appears to be the product of a wider range. factors, ”Jalinoos said.
So what does this pose for the outlook for the US dollar?
Credit Suisse sees a “scattered outlook” for the dollar and anticipates that the currency will likely trade stronger in a range against low yields such as EUR and JPY, but more idiosyncratically and less on a trend basis. compared to other currencies.