US Dollar Forecasts 2016: USD Uptrend Looking Mature Warn TD Securities

The USD’s uptrend has further to run, but it now looks increasingly mature argues Richard Kelly at TD Securities.

The assumption that we are at the start of a protracted multi-month period of USD strengthening should be questioned by new research which suggests the Greenback is nearing its zenith.

The central point of debate amongst FX strategists at the present time is not whether the dollar will get stronger, but just how far the currency will extend its strength.

TD Securities have released their exchange rate forecasts for 2016 and the most striking take-away from the report is the observation that the USD's strength will end in the opening few months of the year.

Richard Kelly is Global Head of Strategy at TD Securities, here are some of the observations Kelly and his team have made, followed by some pointers which we at PSL believe should be considered.

TD: "We do not expect Fed tightening will be USD-positive and look for its strength to peter out early in 2016."

• PSL: This is an interesting take as there is a consensus position that the next leg higher in the cyclical USD uptrend will be underpinned by higher interest rates and interest rates rare in turn expected to rise through 2016. Will this leave markets looking overly optimistic on the prospect of sustained US dollar strength?

TD: "This presents opportunities which will likely grow larger through the year as each passing month of 2016 will mean falling risks of an imminent EM or Chinese crisis."

• PSL: The Chinese slowdown is a big theme for the likes of the Australian and New Zealand dollars as well as emerging market currencies such as the Rand and Real. Should China fall off the rader as a key negative driver in 2016 then we may see the assumption that the NZD, AUD & Co. are in a protracted period of decline questioned.

TD: "The 2016 cycle is based on removing emergency rates and limiting the potential for future financial imbalances - it has less to do with inflation."

• PSL: For the British pound inflation is important. We saw sterling come under significant pressure in the wake of the November inflation report as the BoE downgraded inflation forecasts. If inflation does indeed fall down the priority list then this could well prove to be a positive for the GBP.

TD: "Assuming 100bps rise in US interest rates in 2016, the ex-post impact on the dollar is generally negligible to the extent that it has been anticipated by the market."

• PSL: The dollar has priced in impending interest rate rises, what will it take to push the USD that much higher? We get the sense that US economic data must pick up yet further to push the interest rate curve higher, thereby sustaining a USD advance. 

TD: "The Fed simply isn’t that important. Central banks moderate growth and liquidity, but it is still the macro environment that determines market direction."

TD: "Typically, the dollar tends to peak shortly after the Fed begins to raise rates. All of this provides reasonable support to our assumption for a top in the dollar."

• PSL: Are we seeing the euro and pound at their lows against the US dollar, or should we wait for the US Fed to make that rate rise first and then back a decline in the USD?

In the opinion of TD Securities the US dollar may be nearing its maximum, but as always there are caveats.

"Complications point to a risk that USD strength might linger," says Kelly, "the Fed is likely to get further ahead of global central banks than in previous cycles, so rate differentials might be more USD-positive than usual."

If the dollar does not turn lower, and especially if the dollar strengthens materially, that would pose a significant complication to the 2016 outlook held at TD Securities.

Here are the forecasts in numbers: