George Saravelos, Strategist at Deutsche Bank, explains that grinding spread widening in favor of the USD is expected to show remarkable persistence through 2018 but keeping with some reduction in USD responsiveness to increases in US short-term rates, they have revised down their USD view for the end of 2017, but extended the stronger USD cycle through 2018.
“Our end of 2017 and 2018 forecasts for EUR/USD are now 1.02 and 0.95 respectively. We expect USD/JPY to also maintain a modest positive USD uptrend, ending 2017 and 2018 at Y118 and Y122 respectively.”
“On the policy front, even without a fiscal stimulus we see little reason to factor in a central Fed outlook that is very different from the FOMC’s median dots. A modest tax stimulus, that supports growth in 2018 /19 would be sufficient to propel the USD through major levels, inclusive of parity on EUR/USD. Our EURUSD forecast would survive a one-off hike to the ECB deposit rate provided it stays negative well into 2018. Were the ECB to embark on a quicker than expected hiking cycle our forecast would change.”
“The USD uptrend may be exhibiting some late cycle lethargy, but neither traditional rate spread analysis, or external balance based valuations suggest a USD peak is in place. More likely an elongated top will slowly evolve over the next couple of years, in marked contrast to the ‘inverted V’ that characterized past USD peaks in 1985 and 2002.”