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Don't count on the idea that the United States will always be exceptional. Right now, currency markets are moving very little, and there isn't much happening to make them change. As we approach the end of the month, some news stories suggest the US dollar might get weaker.
Recently, there was a Bloomberg article talking about "US exceptionalism," saying it will help the US dollar stay strong. While I agree with some points in the article, I don't agree that the US dollar will stay strong for a long time. As you all know of now, we can already say that I expect the US dollar to decrease by about 5% from now until the end of the year.
The US has indeed had impressive economic growth compared to other major countries, and the US dollar reached its highest point in September 2022. However, I don't think that peak will happen again, and I rather believe the dollar will become weaker in the medium to long term.
One thing making the US stand out is how it dealt with energy price shocks. Unlike Europe, the US, being an energy producer, didn't face significant energy price increases. This contributed to the US economy accelerating while the Eurozone and the UK experienced slower growth. However, this difference might fade as natural gas prices fall.
The resilience of the US economy also comes from substantial fiscal support, starting with Trump's tax cuts, followed by support packages for companies, and additional help for consumers. Yet, this has led to a high budget deficit, indicating that the US is borrowing growth from the future. The consequence may be weaker growth, potentially higher inflation, and a less strong US dollar. So, while the US has strengths in technology and labor market flexibility, there's a challenge ahead in dealing with unsustainable budget deficits.
USD Index H1
The New Zealand Dollar (NZD) took a plunge following the Reserve Bank of New Zealand's (RBNZ) recent actions. The rates curve, indicating interest rates across various maturities, seemed unusual compared to other major currencies. There was a risk that the RBNZ's statements might not meet market expectations for more rate hikes. Just yesterday, the market implied a 50% chance of a 25 basis points rate hike in May, but after the RBNZ decided to keep the key policy rate at 5.50%, that chance dropped close to zero.
NZDUSD H1
Crucially, the RBNZ acknowledged that risks to the inflation outlook had become more balanced. The updated forecasts also showed a slightly lower profile, with the peak policy rate now expected to be 5.60%, down from the previous estimate of 5.69%. The RBNZ softened its guidance on future policy by removing the conditional need to raise rates further if inflationary pressures were stronger than anticipated. However, the RBNZ remains vigilant about "heightened geopolitical and climate conditions" affecting inflation, pledging to act if needed.
The RBNZ emphasized the need for a "sustained decline in capacity pressures" to bring inflation into the 1%-3% target band. While this communication suggests a softening of the bias to tighten policy further, it doesn't completely remove that bias. The RBNZ conveyed a strong message that the current policy stance will be maintained for a sustained period.
As a response to this, the 2-year bond yield in New Zealand dropped by 16 basis points, and the NZD underperformed due to a significant repositioning in the market, anticipating a potential rate cut. Recent data showed Leveraged Funds holding the largest long NZD position since August last year. However, it's important to note that we are still a considerable distance from considering rate cuts, suggesting that a prolonged decline in the NZD from this point onward is unlikely.
Insights Inspired by MUFG: Credit to Their Analysis for Shaping the Aspects of This Text
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