– Covid Delta fears exaggerated, says Barclays
– The Chinese economy to support global growth
– See the decline in demand in USD
– Wells Fargo Says EUR / USD Rise Is Limited
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Fears about slowing global growth and the impact of the Delta variant appear to be overblown, meaning the dollar’s recent safe haven supply is unlikely to last according to new currency market research.
But analysts of Wells fargo and Barclays say that although the dollar has limited room for improvement, the euro is unlikely to be an outright beneficiary as it faces its own idiosyncratic headwinds
Barclays says the dollar is likely to see safe-haven demand decline in the near term, as investor concerns over rising Covid cases and the Chinese slowdown prove to be exaggerated.
“We expect the security demand for the dollar to decline over time,” Juan Prada, forex analyst at Barclays, said in a regular weekly research briefing.
Such a demand for security was posted on July 19 when global markets suffered sharp declines amid fears that the Delta variant of Covid-19 would slow the global economic recovery, and a review of major markets in early August suggests that the impact of these declines has yet to be fully reversed even as sentiment picks up steadily.
Indeed, outbreaks in China and the US are being watched by investors as cases in the UK and much of the eurozone are declining.
“Concerns about the further spread of the virus have resurfaced. If the increase in COVID cases, in the United States and around the world, were to become widespread and persist for an extended period, the greenback would likely remain supported. This would be particularly the case. whether COVID concerns lead to more significant and continued weakness in the stock markets, ”says Nick Bennenbroek, international economist at Wells Fargo Securities, LLC.
Above: Is the demand for dollars already declining? Performance of the USD over the past week.
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But for many economists, countries with high vaccine penetration are unlikely to be disrupted by the Delta wave; a position emboldened by the UK experience where cases have started to decline despite the restrictions being lifted completely.
The variant is therefore now seen as a greater threat to countries that have high proportions of unvaccinated people, suggesting that an idiosyncratic approach to the market is now required.
“New waves of COVID-19 infections increase downside risks for countries with overdue vaccination efforts. As the severity of the disease appears to be contained in countries with high vaccination rates, differentiation in forex markets on this basis is likely to continue. However, with the continued immunization progress, especially in the G10, we don’t expect the new waves of the pandemic to derail the global economic recovery in any meaningful way, ”Prada said.
But it’s not just Covid that fits into the sense of risk: dollar safe-haven references were in demand again towards the end of July amid a global sell-off of shares linked to a continued crackdown on Chinese authorities on technology shares.
“The Chinese Internet space has been plagued by regulatory uncertainties since Ant’s IPO was suspended in November last year. anticompetitive practices of companies in this space ”, explains Mislav Matejka, analyst at JP Morgan.
The developments prompted global investors to reduce their exposure to China, leading to an inevitable drop in the wider markets and fueling demand for the dollar.
Wells Fargo believes that the strength of the US dollar should persist “for now”, but that weakness in the US dollar is expected in the medium term.
“However, there is a risk that the strength of the US dollar will last longer,” Bennenbroek said.
The nervousness over China comes as markets are already cautious about a more general slowdown in the Chinese economy that has been underway for several months.
“China’s latest regulatory crackdown has sparked turmoil in financial markets, and tightening policies are likely to slow IT industry expansion, maintain headwinds for consumption and leisure in the second half of the year, and pose downside risks to the domestic financial sector, ”Prada said.
However, Barclays believes the negative effect on growth should not be overestimated, as the coordinated crackdown reflects the government’s efforts to direct resources from the internet / tech sector to the basic tech sector and to address social issues and problems. data security concerns, rather than slowing the economy significantly.
Indeed, the bank’s economists continue to expect China’s growth in 2021 (+ 8.5%) to be the strongest of the major economies.
But Barclays warns “any unwinding of the USD offer is likely to be gradual and with two-way volatility.”
Regarding the outlook for the euro-dollar exchange rate, Barclays says the dollar’s reduced safe-haven supply suggests that the short-term direction of EUR / USD is higher, but the scope of euro gains -dollar is ultimately limited.
“The absence of significant domestic risk events will leave EURUSD trading on the winds of global risk sentiment this week. However, the euro is unlikely to be the biggest beneficiary of our call for a weaker dollar at short term, ”Prada said.
Like Barclays, Wells Fargo expects Euro-dollar gains from a dollar decline over the medium term to be relatively small.
“We only expect small gains for the euro over time and see the risks as pointing to even smaller gains, if not outright declines, against the US dollar,” Bennenbroek said.
the European Central Bank (ECB) is seen as a particularly strong obstacle to significant gains from the single currency, given that the central bank appears to be one of the last to raise interest rates.
Money market prices suggest that the ECB will not hike rates until 2024 at the earliest, years after the bank of england, WE Federal Reserve and the majority of central banks in the G10.
“The ECB’s new policy target and more accommodative stance could lead to even more accommodative monetary policy than we currently expect, which should weigh on the euro,” Bennenbroek said.
Wells Fargo predicts that the Euro-dollar exchange rate will end 2021 at 1.17.
Barclays also cited the EBC as a barrier to the euro’s potential appreciation.
“The ECB’s new mandate and updated interest rate forecast mean that the ECB will be far behind its global peers in normalizing its policy. As the eurozone’s economic recovery is in motion, it is also increasingly integrated into markets, ”Prada said.