Dollar Proves Early ’14 Victim as Nomura Exits Trade: Currencies
To foreign-exchange strategists, 2014 was to be the year the dollar broke free from the Federal Reserve’s currency-depressing policies and appreciated the most since the global financial crisis. Then came the snow.
Reports ranging from a drop in housing activity to declines in manufacturing stemming from bad weather have caused the greenback to fall this month against all 16 major currencies tracked by Bloomberg except the yen. Analysts who in December saw the U.S. Dollar Index rising 6 percent by mid-2014 to 84.9 have cut their estimates to 82.9, Bloomberg surveys show.
Winter storms have at times paralyzed large swaths of the U.S. this year, canceling flights, snarling traffic and damping economic activity. Suddenly, traders are starting to wonder whether this may alter the Fed’s plan to reduce its stimulus, a policy that has weighed on the dollar.
“Weather has clouded the interpretation of generally soft U.S. data -- is the U.S. growth trend intact, or is it weakening enough to affect the Fed’s tapering path?” Jose Wynne, the global head of foreign-exchange research at Barclays Plc in New York, said by e-mail on Feb. 13.
Bank of America Corp. said worse-than-forecast economic data caused by the snowstorms prompted its clients to abandon bets for the dollar to rise against the yen. Nomura Securities Co., Japan’s biggest brokerage, exited a trade buying the greenback versus a basket including the euro, yen and Swiss franc.
“We’re trading U.S. data, and they’re being weighed down by the weather,” David Woo, the head of global rates and currencies at Bank of America Merrill Lynch in New York, said in a Feb. 14 phone interview.
An appreciating dollar was the overarching theme of 2014 currency forecasts by firms from JPMorgan Chase & Co. to Morgan Stanley and UBS AG.
The U.S. Dollar Index, which measures the currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, cooperated at the start of the year, rising 1.59 percent in January. It’s down 1.3 percent this month, the most since tumbling 2.3 percent in September.
The yen was at 102.31 per dollar in New York yesterday, strengthening from a more than five-year low of 105.44 on Jan. 2. It will weaken to 110 by year-end, according to the median forecasts of more than 50 strategists surveyed by Bloomberg.
“In the short term, we’re wary that the unwinding of short-yen positions may not be over,” Bank of America’s Woo said. “Unusually cold weather in the U.S. is giving the yen an artificial boost.” A short position is a bet an asset will depreciate in value.
Last month was the coldest January since 1994 in the U.S., according to Commodity Weather Group LLC in Bethesda, Maryland, which based its assessment on demand for energy. The weather is affecting the entire economy, with McDonald’s Corp., the world’s largest restaurant chain, blaming a third straight month of tumbling sales on the snow and ice.
U.S. retail sales fell 0.4 percent last month, following a revised 0.1 percent drop in December that was previously reported as an increase. Goldman Sachs Group Inc. cut its estimate for first-quarter U.S. economic growth to 2.5 percent from 3 percent, while Bank of America lowered its projection to 2 percent, from 2.3 percent.
Citigroup Inc.’s U.S. Economic Surprise Index, which measures data against analysts’ expectations, fell to minus four yesterday, from 73 on Jan. 15, suggesting that economic reports are increasingly missing forecasts.
The dollar is becoming more sensitive to U.S. economic data as speculation rises whether signs of slowing growth will prompt the Fed to keep its stimulus program in place for longer. Fed Chairman Janet Yellen pledged Feb. 11 to keep scaling back the central bank’s bond purchases in “measured steps.”
The 30-day correlation between Citigroup’s Surprise Index and the Bloomberg Dollar Spot Index, which measures the currency against 10 peers, rose to 0.39 on Feb. 17, about the highest since October and up from below zero a month ago. A reading of 1 means the gauges move in lockstep; minus 1 means they move in opposite directions.
“We’ve been consistently downbeat on the economy this year and we’re not surprised to see a run of softer data,” Sean Callow, a Sydney-based currency strategist at Westpac Banking Corp. said by phone on Feb. 12. “We’re pretty bearish on the dollar.”
Nomura took off a bet for the U.S. currency to rise against a basket of its peers on Feb. 3, getting out with a 0.9 percent return, according to Jens Nordvig, the firm’s managing director of currency research.
“We closed our dollar-basket longs at a good level, and we’re in no major rush to get back in,” Nordvig, who’s based in New York, said by e-mail on Feb. 13. A long position is a bet an asset will appreciate. “Further negative U.S. data surprises put in question whether the Fed is willing to continue tapering. We’re tactically now flat on the dollar.”
Given that the greenback’s decline hasn’t been steeper even as U.S. government bond yields have declined shows the currency’s longer-term prospects remain intact, according to Shahab Jalinoos, a senior currency strategist at UBS.
“If you haven’t seen the dollar weaken a lot even when yields aren’t moving in its favor, it’s probably a sign that there’s underlying strength in the dollar,” Jalinoos, based in Stamford, Connecticut, said by phone Feb. 13.
The yield on the two-year Treasury note fell yesterday to 0.31 percent, from 0.43 percent on Jan. 9. The drop reflects waning expectations that the Fed will raise its benchmark interest rate from the record-low zero-to-0.25 percent range it has maintained for five years.
Strategists in Bloomberg surveys have raised their first-quarter forecasts for the euro, U.K. pound and Swiss franc against the dollar this year.
The median prediction of more than 60 analysts for the euro is $1.34, up from $1.32 on Dec. 27, while the pound is now seen gaining to $1.64 by the end of March, compared with $1.60 previously. Estimates for the franc rose to 92 centimes per dollar, from 93 in December.
“We still hold high conviction on a lower euro-dollar, but believe near-term opportunities are more tactical and carry risks,” Wynne at Barclays said.
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