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US dollar has embarked on a ‘multi-year downtrend’ — Nomura

Bad news for dollar bulls.

The slide in the buck in 2017 is just the start of a “multi-year” move lower, according to new analysis on Wednesday by Nomura.

The euro may surge 20 cents to $1.40 in coming years, with the Yen rallying to Y90 “or lower” from Y109 today, said currencies strategist Bilal Hafeez. The dollar index has dropped almost 10 per cent this year, with the currency facing particularly acute losses against the euro.

Mr Hafeez performed an analysis that looks beyond interest rate differentials, which is one of the fundamentals of currency forecasting since investors typically try to profit by borrowing in low-rate countries to buy higher-yielding securities elsewhere.

Of particular interest is purchasing power parity (PPP), a measure of relative prices between countries. Theoretically, when goods and services are priced differently, currencies should adjust since businesses will seek to buy items in areas with lower prices, driving down the the higher-priced country’s exchange rate.

The dollar overshot the euro on a PPP basis by 15 per cent earlier this year, Mr Hafeez reckons, not quite the 20 per cent that usually signals the beginning of a downtrend, but “it did likely mark the full extent of a euro undershoot.” Now, it is the euro’s turn to overshoot, perhaps by as much as 15 – 20 per cent. (See chart above)

Meanwhile, the buck reached its high on a PPP basis against the yen in 2015, at around 30 per cent. “That likely marked the high in this phase of the dollar cycle, and so the multi-year downtrend in dollar-yen has started,” said Mr Hafeez.

Other factors may play a role as well. For instance, President Donald Trump’s push for higher exports as well as his explicit comments against a strong dollar are probably already influencing the buck. “It is likely no coincidence that the dollar has weakened significantly against all major US trade partners since President Trump’s inauguration,” Mr Hafeez noted.

Here is Mr Hafeez’s full dollar check-list: