Is There A Strong Consensus For Dollar Weakness In 2021?
- By Bilal Hafeez
- 1 min read
With the dollar weakening in recent months, it is useful to know whether investors have become excessively bearish on the currency. One way to check is to see whether currency analysts are forecasting dollar weakness for the year. Specifically, we can look at the average of end-2021 FX forecasts across currency analysts and compare this to FX forwards to find which currencies are expecting to appreciate the most.
Perhaps the most surprising outcome is that analysts are neutral on the euro – they do not expect EUR/USD to move much higher than forwards. The end-2021 forecast is 1.24, which is where forwards are. The same can be said for the pound, where GBP/USD is expected to end the year around 1.36, and USD/JPY, which is forecast at 103 – both are around FX forwards. Therefore, it is clear that analysts are not bearish on the dollar. On the contrary, most expect a range-bound year for the majors.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- Consensus FX forecasts indicate no expectation of dollar weakness against the majors.
- Market implication: the bearish dollar trade may not be crowded, which suggests further dollar weakness.
With the dollar weakening in recent months, it is useful to know whether investors have become excessively bearish on the currency. One way to check is to see whether currency analysts are forecasting dollar weakness for the year. Specifically, we can look at the average of end-2021 FX forecasts across currency analysts and compare this to FX forwards to find which currencies are expecting to appreciate the most.
Perhaps the most surprising outcome is that analysts are neutral on the euro – they do not expect EUR/USD to move much higher than forwards. The end-2021 forecast is 1.24, which is where forwards are. The same can be said for the pound, where GBP/USD is expected to end the year around 1.36, and USD/JPY, which is forecast at 103 – both are around FX forwards. Therefore, it is clear that analysts are not bearish on the dollar. On the contrary, most expect a range-bound year for the majors.
There are some stronger views on the smaller G10 currencies. Analysts are most bullish on the Norwegian krone followed by the New Zealand dollar and Swedish krona. They are expected to outperform forwards by between 2% and 4% over the year. On the bearish side, analysts are expecting most weakness in the Swiss franc – it is expected to weaken by 1% relative to forwards.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)