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18 Dec 2015
How high can USD go? - Deutsche Bank
FXStreet (Guatemala) - Analysts at Deutsche Bank explained that the USD continues to conform to multi-year big USD cycles of the past.
Key Quotes:
"Since the fall of Bretton Woods, big USD down cycles of 9 to 10 years have been followed by big USD upswings of 6 to 7 years. While all cycles are different, the macro backdrop conforms to a view that we are about 2/3rds the way through the big USD up cycle, with the real broad index some 50 months into an upswing. In the same vein, the real Broad TWI has in past cycles largely retraced any prior cycle losses, and increased by 53% and 33% in the 1978 - 1985 and 1995 – 2002 upswings respectively. In the last downswing the USD real broad TWI fell by 28%. We expect that the USD will at a minimum fully retrace these losses, fitting with further real broad TWI gains in the order of 10%. In magnitude terms we are then also likely to be a little over 2/3rds the way through the USD cycle, with USD gains henceforth likely to come at a slower pace."
"The main departure in this cycle relative to past cycles, is that the USD gains before the Fed starts hiking rates have been substantially larger than anything we have seen in any prior Fed hiking cycle. This front-loading of USD gains fits with more modest USD gains to come.
"It would however be premature to think that we are close to a USD top. USD tops would likely include the following characteristics:
i) A US C/A blow-out. Big cycle USD peaks usually have the US C/A deteriorating by 3% of GDP or more;
ii) Intervention at valuation extremes. The Plaza Accord in1985 came after the USD peak, but intervention reinforced the turn. The G3 EUR/USD buying in Sept 2000 slightly preceded the cycle low by a month;
iii) USD policy rates are usually falling down the ranking table relative to G10 peers, instead of rising as they will do through 2016 and 2017."
Key Quotes:
"Since the fall of Bretton Woods, big USD down cycles of 9 to 10 years have been followed by big USD upswings of 6 to 7 years. While all cycles are different, the macro backdrop conforms to a view that we are about 2/3rds the way through the big USD up cycle, with the real broad index some 50 months into an upswing. In the same vein, the real Broad TWI has in past cycles largely retraced any prior cycle losses, and increased by 53% and 33% in the 1978 - 1985 and 1995 – 2002 upswings respectively. In the last downswing the USD real broad TWI fell by 28%. We expect that the USD will at a minimum fully retrace these losses, fitting with further real broad TWI gains in the order of 10%. In magnitude terms we are then also likely to be a little over 2/3rds the way through the USD cycle, with USD gains henceforth likely to come at a slower pace."
"The main departure in this cycle relative to past cycles, is that the USD gains before the Fed starts hiking rates have been substantially larger than anything we have seen in any prior Fed hiking cycle. This front-loading of USD gains fits with more modest USD gains to come.
"It would however be premature to think that we are close to a USD top. USD tops would likely include the following characteristics:
i) A US C/A blow-out. Big cycle USD peaks usually have the US C/A deteriorating by 3% of GDP or more;
ii) Intervention at valuation extremes. The Plaza Accord in1985 came after the USD peak, but intervention reinforced the turn. The G3 EUR/USD buying in Sept 2000 slightly preceded the cycle low by a month;
iii) USD policy rates are usually falling down the ranking table relative to G10 peers, instead of rising as they will do through 2016 and 2017."