US Dollar Forecast Q2 2022. Fundamental and Technical Analysis

[MongiIG]

US Dollar Forecast Q2 2022: Dollar Rate Hikes, Conversion and Safety Appeal

It is difficult to tell what role the Dollar will play in the global financial system heading into the second quarter of 2022. On the one hand, traditional risk assets have held back the tide of a more prolific collapse while interest rate expectations have exploded higher. Alternatively, there exists a growing din of concern that markets have over-reached in the post-Great Financial Crisis run and a necessary ‘de-risking’ has yet to occur.

What theme takes the lead is critical for tracking the course of the Greenback over the coming months. There are pressing matters that should be evaluated for USD projections like FOMC rate forecasts and growth projections. Through the scheduled and unscheduled event risk, however, traders should not forget the pressure on the benchmark currency to live up to its ‘systemic haven’ status as crises unfold worldwide and major economies (e.g., Russia and China) seek alternatives to the world’s principal currency.

DOLLAR: THE SAFE HAVEN

Through the opening quarter of the year, there were a few favorable fundamental winds that could have taken credit for the US currency’s appreciation. One of the more neatly correlated matters has to be the reversal in risk trends. Benchmark speculative assets like the US indices put in for a sizable retreat through much of the opening stretch of the year, and the need for safety was at times fairly intense. The scale of fear typically matters for the Greenback as more measured swoons tend to lead investors to be more discerning in where they intend to park their capital.

When US assets are sporting uncompetitive yields, that would make the currency less than ideal a vehicle in which to park your money. I still view the USD as an extreme haven when liquidity is the only consideration. Yet, with the distinctly competitive rise in the country’s benchmark rates, this may prove to be one of the more nuanced refuges. Considering how insistent Fed officials have been about their intentional push forward with accommodation withdrawal, it seems a charge will be maintained.

CHART 1: DXY INDEX OVERLAID WITH VIX, 12-WEEK CORRELATION AND US 2-YR YIELD (WEEKLY)

Source: TradingView; Prepared by John Kicklighter

RATE EXPECTATIONS OUTSTRIPPING OR KEEPING PACE?

Interest rate forecasts are another critical fundamental theme to track in order to understand the Dollar’s intentions. Of course, it is essential to keep a clear sight line on the Greenback, but the relative hawkish or dovish path requires that we compare the US course to its global counterparts. Heading into the second quarter of the year, the Federal Reserve managed to feed an exceptionally aggressive forecast.

After the first-rate hike in March, the Federal Reserve upgraded its own rate forecasts from the three projected in the December SEP (Summary of Economic Projections) to a staggering 7 hikes through year’s end – all meetings with the exception of January. That put us in an unusual position where the leading and speculative market was in-line with the lagging and cautious Fed. Yet, that coincidence wouldn’t last long.

CHART 2: RELATIVE MONETARY POLICY STANCE

Source: TradingView; Prepared by John Kicklighter

Over the coming three months, there are two scheduled monetary policy meetings and announcements: on May 4th and June 15th. At the beginning of April, Fed Fund futures and swaps were pricing in high probabilities (over 60 percent) of 50 basis point rate hikes from the group at both events. That would indeed be a very aggressive stance. It could also prove a significant booster for relative value. While the Fed is still trailing some counterparts with its primary rates of return, fast hikes can quickly close the gap – besides the markets are forward looking with analysis and pricing. For those that have come to truly believe in the ‘central bank put’, the US authority made an exceptional effort to suppress that previously warranted faith.

Why would they do that? They are trying to break a dependency. And the markets believe their warnings. Looking at Fed Funds futures, we have seen the most aggressive near-term hawkish rate forecasts in over two decades.

CHART 3: DXY DOLLAR INDEX RELATIVE TO IMPLIED FED FUNDS YIELD OF NEXT MEETING

Source: TradingView; Prepared by John Kicklighter

THE OUTLIER RISK FOR THE DOLLAR: DIVERSIFICATION

In all likelihood, the Dollar will draw upon its own interest rate expectations relative to counterparts or the state of market-wide sentiment to determine the fundamental current. However, correlations can wax and wane with a shift in systemic relationships. One of the outliers matters for which I have warily watched over the past quarters and years is the effort to diversify away from the world’s most liquid currency. The push was far more broad and severe with the previous administration’s push for trade wars, but circumstances seem to cement the Dollar its previously stated purpose.

That said, there are large countries that are seriously motivated to push the world away from the USD. Russia was the more charged alternative seeker this past quarter owing to its efforts to circumvent Western sanctions. The bigger player looking to diminish the sway of the US and its currency has been China. The world’s second largest country has long harboured an interest to top the list and more meaningfully influence the global status quo. Given the unrelenting problems with Covid, trade partners’ response to Russian sanctions and overleveraged local conglomerates, there is stronger incentive to push the Yuan as a Dollar challenger. This will not be a serious threat for some time; but in the interim, it could seriously disrupt trends born out of ill-formed conviction.

 

Apr 7, 2022 |  DailyFX
John Kicklighter, Chief Strategist

[MongiIG]

US Dollar Q2 Technical Forecast: USD Bullish Channel, 20-Year Highs in Sight

Apr 2, 2022 | DailyFX
James Stanley, Senior Strategist

 

Q2 2022 FORECAST FOR THE US DOLLAR: BULLISH

During the second quarter of 2022, the US Dollar started to turn higher. In Q1 of 2021 we began to see the reflation trade getting priced into markets, boosting US Treasury yields and the US Dollar along the way. The Greenback set a swing high on the final day of Q1 2021 trade before reversing through the first half of Q2, eventually finding support around the same 90 psychological level that had held the lows earlier in the year. But after bulls got back in the driver’s seat in June, a bullish trend began to develop that remains in effect today.

Along the way, there’s been considerable jostling on the fundamental side. What once seemed unthinkable is now commonplace, with inflation rates raging above 7% and holding at 40-year highs. The Fed, at this point, appears to have no choice.

They’re going to have to hike, and markets have aggressive expectations already built in. But one look at equities that’ve held up through this sudden and dramatic re-pricing in rates and it becomes clear that market participants are already starting to focus on the possible cuts that the Fed will implement after this hiking cycle; in essence, expecting the Fed to be able to pull off a hat trick of hiking rates, crushing inflation and then dropping rates again to boost stocks.

And perhaps that happens, I don’t know, but this isn’t a fundamental forecast, it’s a technical one, and the job here is to evaluate the chart in order to set expectations for what we might be able to anticipate in the coming quarter. I remain very bullish on the USD.

Price action in the USD has just spent the bulk of March trade oscillating around resistance, near the top side of that bullish channel that started to set in Q2 a year ago.

US DOLLAR INDEX (DXY) – WEEKLY TIMEFRAME (2017 TO PRESENT)

Source: TradingView; Prepared by James Stanley

USD LONGER-TERM: A CRITICAL AREA APPROACHES

Taking a step back to the monthly chart of the USD and it becomes clear that the currency spent much of the past seven years in a range-bound environment.

To be sure, there’s a fundamental drive there, often with the inter-play between the Euro and the US Dollar. But, given the trajectory of the shorter-term trend that’s now projecting a tangle with resistance in the not-too-distant future, this zone is worthy of a look.

There’s been a tendency for resistance to show above the 100 level over the past seven years and, bigger picture, this has been problematic pretty much ever since the Euro came into circulation. But now that we have such divergence between the US and European economy, the door may be open for a topside break.

For upcoming resistance, the 100 psychological level looms large and there’s a Fibonacci level at 101.80. Beyond that we have the 20-year high plotted around 103.54. A breach of that brings fresh multi-decade highs to the USD and I think this is a possibility for 2022 trade, although I’d anticipate it to be more of a second-half type of theme. At least I hope that it is, because if this develops faster it will send a very negative signal about global growth.

DOLLAR INDEX (DXY) – MONTHLY TIMEFRAME (2001- PRESENT)

Source: TradingView; Prepared by James Stanley

The Q2 forecast will remain at bullish for the US Dollar, looking for the currency to continue the topside trend that sparked a year ago while adhering to the channel that’s guided the move higher. And, as I said in the Q1 forecast, the motivation for that bullish lean isn’t entirely technical either, as the fundamental environment remains too attractive to ignore at this point. And at this point, it would appear that we have a mesh of fundamental potential and technical criteria that keeps the door open for fresh 20-year highs at some point later this year.