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US Dollar’s Supremacy is Under Threat

US Dollar Supremacy

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The “King Dollar” will almost certainly be removed from his throne in 2023. It has been a robust period for the greenback over the past 18 months. Still, it is likely to end as the Federal Reserve of the United States gets closer to the end of its rising cycle and the economy of the United States enters a potential recession.

As the Japanese yen has suffered some of the most significant weaknesses against the United States dollar, I mentioned in my column on December 21 that this offers a strong argument for holding unhedged positions in Japanese stocks. The Japanese yen has suffered some of its most significant weaknesses. On the other hand, the identical pattern of the dollar’s decline will also occur in other markets. Suppose the local currency strengthens relative to the dollar in 2023. In that case, some Asian equities markets will be able to give a passive benefit to investors in the United States. After the transaction, the value of any gains appears to have increased when converted back into the weaker greenback.

Add to that the likelihood of a return to risk and allocations in developing markets among global investors, and it appears that Asian emerging market plays will be successful. Although I am hesitant to trade foreign exchange directly, I believe that unhedged exchange-traded funds that provide access to any of the currencies listed below will be profitable.

It would appear that Nomura is on the same page as everyone else. I have just received a fascinating analysis from their global FX strategists that outlines their current top five currency trades. And making the most of the strengthening of currencies in the region, four of the top five are in Asia.

A reduction in the inflation rate in the United States has been the primary factor behind a trendline reversal in favour of the United States dollar. After reaching a high point of 9.1% in June, the inflation rate began a slow and steady descent in October, dropping 500 basis points. According to the most recent statistics available for November, it currently stands at 7.1%, with apparent further room to fall. Because inflation is still sufficiently high, officials from the Fed continue to claim that they haven’t done enough yet. Yet there is no doubt that the rate hikes will end soon, most likely this year.

The value of the U.S. dollar index, or DXY, skyrocketed from 90.0 in the middle of May 2021 to 113.3 in the middle of October 2022, representing a massive increase of 25.9%. Although the inflation numbers have become less severe, it has had an abrupt decline, dropping by an alarming 8.6% to 103.6 on December 26; however, it has been able to reverse this trend in the past week and is now at 105.3.

After the most recent meeting of the Fed, which took place on December 14, Nomura’s belief in its currency trades has grown. The investment bank now projects that there will be a last increase of 25 basis points in March of 2023. Because of this, there is a more severe short bias on the United States dollar globally.

Although it will result in a significant and distressing outbreak of Covid right now, the reopening of China that will be made possible by the termination of the zero-Covid policy would likely prompt capital in the long run inflows into developing markets and Asia.

They call because of this.

1. Short U.S. Dollar/Long Chinese Yuan

As a result of the Japanese central bank establishing a target rate of C6.60 to the United States dollar by the end of February, the conviction rate for this call has increased to a “4” out of 5, up from a “3.” The yuan value is currently equivalent to 6.86 Canadian dollars, indicating a 3.8% increase over the short term.

More reopenings in China at a quicker pace could result in higher benefits for the yuan. On January 8, China will eliminate most travel regulations, including an obligatory quarantine for returnees. This will occur the same day the Beijing administration may reveal more significant specifics on how it intends to revitalize the economy. Any improvement in the outlook for the Chinese economy would persuade foreign investors to take another look at the country, resulting in capital inflows that would lend more support to the RMB.

2. Short U.S. Dollar/Long Japanese Yen

A similar reasoning may be applied to the yen, which Nomura forecasts will increase to a target value of 127 by the middle of February. The current price is 134.30 yen. That results in a 5.4% yen value increase over the short term.

In October, the value of one dollar in yen reached its highest point since 1990, reaching a peak of 150 yen to one dollar. This marked the end of the asset bubble in Japan. Yet the slowdown in the rate of development of inflation’s frenetic pace in the United States triggered a quick correction, with sudden bouts of strength in the yen occurring in November and December.

It is also essential to watch the Bank of Japan, which will soon have a new governor after the current one, Haruhiko Kuroda, steps down in April. Last month, the Bank of Japan (BOJ) made some adjustments to its monetary policy; nonetheless, I interpreted those changes as a concession to the weakening of the yen, enabling the bank to maintain lower interest rates for a more extended period. There is always the possibility of a policy change, with each hint of monetary tightening just adding wind to the sails of the yen.

3. Long Euro/U.S. Dollar

The only play in this lot that does not take place in Asia. The mild winter Europe has been experiencing so far may not be ideal for ski resorts in the Alps. Still, it has helped ensure that the most remarkable predictions over skyrocketing gas costs and electrical shortages have not come true. Therefore, the quantity of gas stored has remained more significant than usual, while Germany has been shifting as much as possible toward the production of power from coal to lessen its dependency on Russia.

In stark contrast to what has been happening in the United States, governments across Europe have strengthened their monetary and fiscal defences in anticipation of an impending recession. The members of the Nomura team believe that “overall glimmers of hope down the road are why we feel that being long EUR may be the trade in 2023,” in contrast to the previous year.

In addition, they have a conviction call with a score of 4 out of 5, which sets a euro exchange goal of $1.10 for January. You will get $1.06 for every euro that you sell at the moment.

4. Long Thai Baht vs. Short U.S. Dollar

This case has the highest possible conviction rating of 5 out of 5! Nevertheless, Nomura is going from having a weight that is evenly split at 50% to having a weight that is two-thirds short on the dollar. The Japanese financial institution had a current bullish position on the Thai baht, and they anticipate a total gain of 10% on the deal by the time February is out.

In the year leading up to Covid 2019, Chinese travellers comprised 27.6% of Thailand’s overall tourist population. This makes Thailand the country that benefits most from the revival of Chinese tourism. According to Statista, the tourism sector in Thailand accounted for 17.9% of the whole GDP in 2019. Thailand is also the economy that receives the greatest weighting from the travel and tourism industry.

According to Trip.com (TCOM), Bangkok was one of the most popular places booked after the quarantine was lifted for Chinese tourists who had previously travelled abroad. Nomura anticipates 28 million tourist arrivals in 2024, far more than the government’s prediction of 25 million passengers, which has already been boosted.

Thailand may be negatively impacted as a manufacturing hub if the global economy and demand decelerate. However, these potentially negative consequences might be counterbalanced by lower prices for Thailand’s imported energy and freight transportation.

5. Long Singapore Dollar/Philippines Peso

The Singapore dollar is managed against a basket of Valuable currencies, and the Monetary Authority of Singapore employs non-traditional means to carry out its monetary policy through the usage of the currency. Nonetheless, the Singaporean central bank has been tightening monetary policy, and the “slope” of the exchange rate has been adjusted correspondingly.

The annual inflation rate in Lion City is anticipated to reach 6.2% in the first quarter. Thus, the tendency toward tightness will most certainly continue throughout this year. In contrast, the Filipino peso is under pressure to depreciate, which the Philippines’ central bank is not expected to be able to stop.

Based on the conviction scale, this trade only receives a score of three out of five, making it Nomura’s least confident prediction. Nonetheless, it forecasts that the SNG/PHP call will improve by 600 basis points by the end of February.


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