Analysts at Rabobank, see the outlook for flows in and out of the USD as linked to confidence in emerging markets. They point out that when the market is again prepared to re-invest heavily in EM, they would expect the tide to turn against the greenback.
“The actions of the Fed in boosting liquidity provision to markets were successful in taking the edge off the panicked buying of USDs last month. The improved access to USDs through swap lines and, for central banks in developing countries, the offer of overnight dollar loans has been a crucial element in easing immediate USD shortages. The improved supply of dollar in tandem with the Fed’s aggressive policy actions on interest rates and on QE have sparked a discussion about whether the USD is now primed for a correction. While the easing of panic in the market has taken the USD index off its recent highs, in our view the USD cannot be expected to weaken decidedly until investors feel confident enough to move back into emerging markets. This could be some way off. In the meantime additional bouts of USD strength are likely as investors absorb the full economic calamity associated with lockdowns.”
“When the market is again prepared to re-invest heavily in EM, we would expect the tide to turn against the USD. That may be some time. In the meantime we expect continued broad-based strength in the USD. While we see scope for a dip back towards EUR/USD1.05, USD strength is likely to be more marked in other currency pairs. Amongst the G10 currencies the NOK, AUD, NZD and CAD could continue to be more volatile given their association with commodities and their resultant sensitivity to fears about global growth.”