U.S. Dollar Still Forecast Lower in 2021 by Unshaken Analyst Community

- Consensus backs USD weakness
- Despite decent start to 2021
- RBC Capital, Bank of America see USD stronger this year

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Despite being the best performing major currency of the past week, and being a mid-performer in the G10 this year - foreign exchange analysts remain unshaken in their view that 2021 will be a year of decline for the currency.

"For the fourth year running, analysts started 2021 forecasting an overarching theme of USD weakness. Price action so far has challenged that view, with USD flat to higher against most of the majors and anecdotal evidence suggests the consensus may be beginning to waver," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

The Dollar was tipped by the majority in the analyst community to fall over coming months as the U.S. and global economies found their feet and started to recover from the covid-19 crisis, creating the kind of market conditions that typically correspond with Dollar weakness.

However, a rise in U.S. yields over recent weeks has created a demand for the Greenback that has countered the consensus view. In addition, the timing of the first U.S. Federal Reserve rate hike has been brought forward notably over recent weeks, which has further added the Dollar.

Indeed, the Euro-Dollar exchange rate is up 1.0% in 2021 and the U.S. currency has registered gains against the Krona, Franc and Yen. The Dollar's biggest underperformance comes against a resurgent Sterling, with the Pound-to-Dollar exchange rate down 2.20% in the year so far.

However Cole's research suggests the consensus amongst the analyst community remains pitted against the Dollar and "we are still in a very small minority looking for moderate USD gains this year."

Image courtesy of RBC Capital Markets.

"The chart shows a calendar spread of analysts’ forecasts for USD against the major currencies (Bloomberg consensus) – the difference between short term (generally around 3m) and long-term (around 12m) on a rolling basis. This measure is less volatile than comparing consensus to spot and we think gives a better sense of sentiment, even when spot moves away from published forecasts," explains Cole.

Cole notes that since the volatility around the start of the pandemic, very little has changed, with consensus characterised by a steady USD decline across the board. This may partly reflect the stubbornness of sell-side strategists.

"But measures of positioning by investors also still show a significant USD short bias. Both the IMM data and our proprietary positioning indicators show still extended USD shorts, though both have been scaled back somewhat from the extremes," he says.

RBC Capital Markets continue to think that some of the reasoning behind the negative view on the Dollar does not stand up to scrutiny (the role of real rates, likelihood of global growth catching up with the US, etc).

"Our forecasts have USD broadly stronger in 2021, though at a more moderate pace than the 1.5% gain (DXY-terms) seen in the first two months of the year," says Cole.

Meanwhile Bank of America have told clients they see Dollar appreciation in 2021, arguing that the re-pricing of global rates markets on diverging economic prospects is emerging as a key source of U.S. Dollar support.

"We expect this process to continue as the magnitude of relative Fed normalisation increases and timing becomes more proximate," says Bank of America analyst Ben Randol.

He predicts a bottoming process will play out out as capital flows & positioning shifts precipitate U.S. Dollar appreciation in 2021.

"A steeper, more proximate path of Fed normalisation relative to global central banks is broadly beginning to support the US dollar, our analysis shows. This evidence supports our bullish USD thesis," says Randol.

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