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The dollar touched a two-month low against the Yen. How would you evaluate the current performance of the US Dollar against its major peers?
Long positions in the US Dollar looked very stretched a month ago. What we are seeing now appears to be a gradual unwinding of long positions. The driver for this in our view is most likely expectations of the policy response for Europe and potentially for the US. That is reflected in the Dollar weakness we have seen recently.
What performance do you expect after the Fed's meeting later on today?
Our main scenario is that we will not see any monetary easing today. If that is the case, most likely the market impact will be fairly modest; because it appears that the market expectations are quite low ahead of FOMC. Few analysts expect the QE announcement today, some are expecting the Fed to change its language on when it is likely to increase the interest rates from 2014 to 2015. There are some discussions about a cut in the interest rate the Fed pays on bank reserves. However, it appears that the expectations are very low.
What is your outlook for EUR/USD and USD/JPY for the end of August and for the end of the year?
Our end-of-August view is that EUR/USD is more likely to end lower than higher, but of course it will all depend on the policy response. It is the timing of potential policy response that we will have in August and for that reason we could be in a quite volatile market. If we look at the investors' positioning, most investors already short EUR/USD. If we see a strong policy response, we could see EUR/USD higher. However, in our main scenario we still see some pressure to downside.
Regarding USD/JPY, the cyclical drivers would usually generate downward pressure on USD/JPY in the current environment. That is also what we are seeing. The unknown is when the Fed is likely to use the monetary policy again. If that happens in September, we might see a reversal in USD/JPY to upside again. But for now and until we see the Fed's easing, pressure is on a downside.
What long term impact we might me see on the US Dollar from the QEs and Operation Twists?
In general it should be Dollar negative. The only reason why we have not seen this is more negative drivers mainly in Europe but also in other places of the world. As long as we have an environment with high global recession risks, and as long as we have unresolved Eurozone crisis, we still see high demand for the US Dollar and that would keep it strong despite the fact the Fed has eased its monetary policy significantly. Of course in a normal environment and if things were stabilized, we would expect the Dollar to gradually weaken.