JP Morgan think there is still more upside left in the dollar
New York (Feb 2) ent bank JP Morgan says the USD could move a leg higher in the near future. The firm noted the U.S. Federal Reserve provides the foundation for the move with a promise to deliver multiple rate hikes over the next two years. The Federal Reserve in January communicated that the U.S. economy had reached full employment and that they would therefore need to raise interest rates to tackle inflation.
Daniel P Hui, an analyst at JP Morgan said "The market is now having to take seriously the prospect that the Fed acts hard and for a more protracted period, irrespective of the reaction of risk markets,". He then added, "This, in turn, has opened the door for another leg-up in the overall dollar index".
"If the markets coalesce around six hikes a year, and raise the terminal rate to 2.25% for sake of argument, this might imply 3% upside for the dollar," says Hui.
This calculation is based on historical rate relationships and JP Morgan assumes "some beta of empathetic Rest of World rates repricing as U.S. yields rise".
"Incidentally, this 3% is also the average historical rise in the dollar typically seen 2-3 months before Fed lift-off and the peak of US OIS and USD pricing," says Hui.
JP Morgan's economists warn of downsides to global growth from a geopolitical-side supply surge in energy prices linked to Russia-Ukraine.
"The macroeconomic implications from a worst-case scenario of war and an intentional withholding of oil exports could be more severe than other supply shocks from the last decade," says Hui.
The Dollar would be an obvious beneficiary as global currencies with a high sensitivity to growth were to retreat.
JP Morgan's foreign exchange strategists say they are looking to sell the Euro and Yen against the Dollar, largely in anticipation of higher U.S. interest rates relative to those in the Eurozone and Japan. "We expect FX to still be driven by the twin forces of policy divergence with focus on the Fed and higher commodity prices, although geopolitical risks have now emerged as a risk factor as well," says Hui.
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