All Bets are on the USD - Are Things Turning Around?

BUDAPEST, Hungary, February 13, 2015 /PRNewswire/ --

Everyone is talking about it, it is so obvious for all of us but is it the best business for sure? Since last summer, the USD is unstoppable, becoming stronger and stronger compared to other currencies. But is it really this simple?

"Foreign exchange market predictions are generally considered to be risky, many things can have an impact on exchange rates," said Karád Kovács, Senior Analyst at Innovative Securities. "Trends depend on the fundamentals, the differences between economies and central bank policies: this is obvious from the current trends.

"The US for example recovered fast from the 2008/09 economic crisis. The base rate was fast slashed to zero and money printing was launched by the asset purchase programme (QE). But Europe had a harder time: decision makers were divided," mentioned the analyst. "European Central Bank only now got to the point (due to the fear of deflation) to slash the base rate and to launch asset purchase.

"In the meantime, the US is preparing for rising interest rates which will influence bond yields, thus they remain one step ahead. However, the market is uncertain regarding the timing and the degree of the rise," said Kovács.

"Those who wanted could take stakes and Europe's QE programme should not surprise anyone. The adjustment did not take long: the euro has fallen 20% against USD. Many reasons imply that the euro's further devaluation should not be expected."

What's next? 

"The market predicts that European low interest rates completed by asset purchase pushes investors towards risky investments," mentioned the analyst. In addition, lower interest charges of government debts, falling oil prices, weak euro and increasing bank credits show that European economy will grow.

The Commitment of Traders report (source: CFTC) shows that hedge funds and speculators hold a high level of net dollar long contracts. The trade is probably overdone, at least in short term. The USD Index hit 12-year high but we can observe some kind of hesitation at current levels. We couldn't predict the exact time of the reversal but there is a potential for a correction reaching to 1.20/1.25 levels regarding EURUSD in the coming months. Many speculators would be surprised by this. However, going against the trend could be risky but buying the buck at current levels may also not be rewarding.

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