It’s Too Early to Drop the Dollar for This Top FX Forecaster

(Bloomberg) -- Ask the top foreign-exchange forecaster what she’s watching in the first half of next year, and she’ll tell you the bull market for the U.S currency may not be over yet.

“If I had to pick out one theme, it would still be the dollar,” said Jane Foley, head of FX strategy at Rabobank, the most accurate predictor in Bloomberg’s quarterly poll for the July-September period. “There’s a possibility the dollar holds stronger than what the market is expecting for the first few months of 2020 and then it weakens, but not as much as the market is anticipating.”

Rabobank, which has consistently been in the top ten of forecasters since mid-2017, is not alone in seeing the currency entering next year in good shape. Westpac Banking Corp., the second-most accurate predictor for Group-of-10 currencies, also sees the greenback starting the year on solid footing before losing ground. Barclays Plc., in third place, forecasts the dollar advancing against the euro through 2020.

Getting the dollar right will be central for the financial industry’s forecasts for everything from other major currencies to oil, gold and bond markets. Optimism on the greenback defies the consensus view that it will weaken against most G-10 peers in 2020, potentially complicating that calculation.

The currency is heading for the worst quarter since the start of 2018, with a partial U.S.-China trade deal and the prospect of a smoother Brexit sending traders toward riskier assets. Yet some say it could strengthen if other economies continue to struggle and currencies like the yuan and euro don’t stage a meaningful advance.

Goldman Sachs Group Inc. has some advice for any traders betting that a weak fourth quarter is the start of a major downtrend for the dollar: “Hold your horses.”

“Enthusiasm for the bearish dollar trade is running high,” Goldman analysts, including Zach Pandl, co-head of global foreign exchange and emerging-market strategy, wrote in a note Dec. 15. “For the dollar to depreciate meaningfully, the euro and yuan need to appreciate meaningfully -- and we do not see a compelling case for either at the moment.”

Rabobank’s Foley predicts the euro will trade at $1.08 by mid-2020, down about 3% from current levels and lower than the $1.13 consensus. She sees the Federal Reserve easing policy later in the year and the euro climbing to $1.13 by the end of 2020. Westpac sees a similar trend with the euro reaching $1.10 by mid-2020 before ending the year at $1.12.

The Fed, for its part, has said it will likely stay on hold for all of 2020. Other central banks could outdo the Fed in dovishness, therefore leaving the dollar stronger by default once again.

Barclays, meanwhile, sees the euro sliding to $1.07 by end-2020 -- about a 4% decline from current levels. It stuck to the outlook after Washington and Beijing agreed on a phase-one deal last week.

The dollar could also advance if other major economies fail to stage a convincing pick-up in 2020. Data on Monday showed Germany’s factory slump deepening, just as it appeared to be exiting a year-long decline. French industry has also effectively stalled this month, while U.K. manufacturing suffered its worst month in more than seven years. In China, meanwhile, a pick-up in the economy in November has added to trade-deal optimism, though risks remain as 2020 draws near.

While the pound rallied after the Conservatives won the U.K. election, it erased all of its recent gains against the dollar on Tuesday after Prime Minister Boris Johnson revived the threat of a no-deal Brexit at the end of next year.

Some on Wall Street see a bleaker outlook for the dollar, fueled by receding trade tensions and signs of economic recovery outside the U.S. Betting against the greenback versus the euro was among Morgan Stanley’s top trades, while UBS Global Wealth Management forecasts the shared currency to appreciate about 7% from current levels to end 2020 at $1.19.

Nikolaos Sgouropoulos, a strategist at Barclays, warns investors could be at risk if they conclude the dollar will continue to weaken.

“We worry more that markets may misguidedly interpret recent dollar softness as a trend into the new year, with significant consequences for a painful short squeeze,” he said.

While Rabobank and Barclays analysts aren’t calling for the dollar to reach new highs in 2020, they caution the greenback won’t fare as badly as widely predicted, as happened this year. Trade spats, the complex Brexit process and overall subdued economics have hurt sentiment and boosted the dollar. The U.S. currency has climbed about 3% against the euro this year, adding to a 4.7% advance in 2018.

Rabobank’s Foley sees shifts in emerging-market debt driving global demand for the greenback.

Dollar-denominated debt in 21 major emerging-markets economies has surged to about $6.1 trillion, from $2.9 trillion in 2008, according to an estimate by the Institute for International Finance. Goldman Sachs sees this trend persisting in 2020.

“There have been structural factors affecting the dollar for years which the market hasn’t fully accounted for,” Foley said. “It’s related to the growth in emerging markets, particularly in Asia -- you now have a very significant demand for dollars that didn’t exist before.”

--With assistance from Michael G. Wilson and Mark Tannenbaum.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, William Shaw, Neil Chatterjee

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