In its Exchange Rates Quarterly note out on Monday, the firm said the dollar would benefit over the coming months from an intensification of expectations concerning the timing of the Fed’s first interest rate hike, but, as yet, it has not not benefited much from such expectations.
Indeed, it said: “these expectations have subsided in recent weeks after Janet Yellen’s testimony before Congress, when the Chair suggested the Federal Reserve was in no hurry to raise the Fed Fund rate target.”
As it points out, the implied 3-month rate for the December 2015 Fed Funds futures contract, prices in just one 25bp hike in 2015 and this is after the latest employment situation report.
Rather, Natixis pointed out, that in the year to date, the dollar has benefited from an upbeat global environment characterised by a “simmering currency war”.
“With scant fiscal leeway to prop up economic activity, most countries are using the last lever at their disposal, namely exchange rates, pursuing increasingly more accommodating conventional and non-conventional monetary policies to have more competitive exchange rates,” the asset manager said.
This is likely to change in the next three months, however, as it expects the Fed to start hiking rates in June.
When that happens, Natixis said, it will lead to “an acceleration of the US dollar’s appreciation against those G10 currencies that are the most fragile for pursuing accommodating monetary policies (euro, Japanese yen, Swiss franc, Swedish krona, Norwegian krone, Australian dollar, New Zealand dollar, etc.) and also against most emerging currencies.”
It expects the DXY dollar index to test the 104.5 level rapidly, “At which level it will be overvalued as measured by the real effective exchange rate,” it said.
