USD Weakness to Continue, More Pronounced in Asia: Nomura By Investing.com

Investing.com — Analysts at Nomura in a note on Tuesday forecast continued weakness in the US dollar, particularly in Asian markets. This outlook is driven by several macroeconomic factors, positioning adjustments and portfolio reallocations, which are expected to exert downward pressure on the USD in the coming months.

Nomura anticipates a narrowing of the growth gap between the US and Europe, which has been a significant factor in the USD’s strength.

The US is expected to see its growth performance weaken, with the US-EU GDP growth gap expected to narrow from 1.6% in Q2 2024 to 0.6% in Q3 2024 and 1.0% in Q4 2024.

“This is likely to support EUR/USD, while our discussions with market participants have concluded that there are positioning risks towards recent highs of 1.1139 in December 2023 (and 1.1276 in July 2023; last at 1.1077)”, the analysts. said.

Significant shifts in speculative positioning are another factor contributing to anticipated USD weakness. Although the positioning has been reduced, Nomura analysts believe there is potential for these positions to go short against the USD.

This could be driven by an increased portfolio allocation to Emerging Markets (EM) Asia, as well as a reduction in USD accumulation by corporates, retail investors and life insurance companies.

The USD’s substantial build-up in Asia, particularly China, Taiwan and Korea, could begin to unwind, putting further pressure on the USD.

Foreign portfolio investment in Asia is expected to increase, driven by a recovery from outflows that began in July 2024. Despite recent net foreign capital outflows in Taiwan and Korea, there are signs of a rebound, which could lead to growth capital inflows into Asian markets. .

Real money investors have maintained their underweight positions in Asian bonds and there is potential for reallocation, particularly in markets such as Indonesia.

In addition, financial markets in Asia are still recovering from the significant outflows experienced during the COVID-19 pandemic, which could further support a weaker US dollar as these markets stabilize.

Historically, the USD has tended to weaken in the period leading up to and following the Federal Reserve’s first interest rate cut. With the Fed expected to begin its rate-cutting cycle in September 2024, Nomura anticipates further USD weakness, particularly against Asian currencies.

The past five Fed rate cut cycles have seen USD/Asia currency pairs weaken by an average of around 2% in the month prior to and following the first Fed cut. Moreover, most Asian central banks are unlikely to be active in USD buying in the early stages of an Asian currency recovery, given that most Asian currencies remain undervalued by various valuation metrics.

China’s economic situation remains a critical factor. Nomura suggests that a significant policy package aimed at stabilizing the housing market could be introduced by the end of the year, which would likely support further USD weakness.

A more stable Chinese economy could boost confidence in Asian currencies, exacerbating the USD’s decline in the region.

The upcoming US presidential election poses additional risks to the USD. While current polls suggest a potential Democratic victory, uncertainties surrounding a potential Trump victory could lead to USD volatility.

If Trump were to focus on issues like geopolitical tensions, pressure on the Federal Reserve and efforts to weaken the USD, there could be even more downside for the currency, especially if these policies are a priority early in his term.