BENGALURU (Reuters) – The reflation trade that spooked currency markets and threw them into disarray will be in play for at least another month, according to a Reuters poll of strategists, who were still holding on to their outlook for dollar weakness in the long run.
Benchmark U.S. Treasury yields vaulted to their highest since the pandemic began last week on improving economic expectations and inflation concerns, what has become known as the reflation trade.
That dramatic surge in bond yields, which knocked global stocks off their record highs, has challenged overwhelming bets against the dollar, with the currency up over 1% this year.
While recent moves have confounded analyst expectations for a weaker dollar in 2021, the March 1-3 poll of over 70 foreign exchange strategists showed the consensus for broad dollar weakness in a year was still intact.
But a majority, 50 of 65 strategists, in response to an additional question predicted moves in currency markets based on an upswing in economic activity and prices, or the reflation trade, would continue for at least another month, including 33 who said over three months.
“There is this battle going on now between the pricing-in of this reflation trade and on the other hand the central banks just wanting to temper the pace of the optimism,” said Jane Foley, head of FX strategy at Rabobank.
“We’ve got this period of struggle between the bond markets and the other central banks trying to keep optimism from getting too significant – and in that period what we might see is the dollar being a little bit more resilient than the consensus has been expecting.”
Graphic: Reuters Poll- Currency market outlook –
Despite those predictions for dollar resistance in the near-term, global stocks were forecast to continue their rally over the coming year, according to separate Reuters polls of equity strategists and investment managers.
That lines up with the latest currency market outlook, which showed the dollar’s appeal against most currencies would be sapped once volatility ebbs and normalcy returns.
“Yes, real yields will be higher, but then there’s a level of yields which will be consistent with the fact the (growth) outlook is more optimistic. If we stabilize for two or three weeks, the market will decide you can live with it,” said Steve Englander, head of G10 FX research at Standard Chartered.
“I’m still pessimistic about the dollar with everything that’s going on. What gives me confidence in my outlook is: there’s no piano which dropped out of a window that landed on the sidewalk, and they’re looking at it and saying – wow! Nobody will ever be able to fix it.”
The euro, down more than 1.0% this year, was forecast to trade at $1.21 in a month, around where it was on Wednesday. It was then expected to reverse trend and gain over 3.5% to $1.25 in a year.
Sterling, up over 2%, was forecast to change hands at $1.42 in a year, a further 2% gain from just below $1.40, where it was trading.
When asked which currencies would outperform against the dollar over the next three months, 38 of 63 strategists opted for commodity-linked currencies, – which have had a dream run so far this year – tracking the rise in commodity prices.
The others were split between developed and emerging market currencies.
Commodity-linked currencies such as the Aussie dollar, the Kiwi dollar and the loonie were predicted to gain further in 2021 after hitting multi-year highs last month.
“Broader market thematic of reflation, commodity rebound, vaccine trade remains in play. Pro-cyclical FX such as AUD, NZD … can benefit while countercyclical FX such as USD stays on the back foot,” noted analysts at Maybank.
“The trajectory for the dollar remains broadly similar and modestly skewed to the downside for 2021.”
(For other stories from the March Reuters foreign exchange poll:)
Reporting by Hari Kishan; Polling by Nagamani L and Swathi Nair; editing by Rahul Karunakar, Larry King