The beginning of the end of the dollar’s rally - ING

Now that the global trade war has resonated with the Fed it seems appropriate to start talking about whether the eighteen-month dollar rally is over, analysts at ING noted.

Key quotes:

“Our house view of an escalation of the trade conflict over coming quarters – and more importantly at least two cuts from the Fed – suggest USD/JPY has indeed peaked.”

“The dramatic decline in US rates over the last month has taken some of the shine off the dollar. Our team now looks for Fed rate cuts in Sep and Dec, though this should be an insurance move rather than the start of a major easing cycle. However, the fact that US trade wars are hitting home – and that we don’t expect a cessation in the conflict until early 20 – has harmed the dollar.”

“In an environment of Fed easing during a global trade war we would expect USD/JPY to lead the dollar decline. The BoJ’s ability to intervene and sell JPY looks very limited since Japan is already on US Treasury’s monitoring list and fulfils two of the three criteria for being designated a currency manipulator.”

“The BoJ’s nominal trade weighted JPY measure is pressing 105 and could easily hit the 2016 Brexit highs of 110 later this year if global trade deteriorates. That would put USD/JPY at 102/103.”

“It looks like Japan will see a VAT hike in October and the BoJ threatening easier policy either by a lower policy rate (now -0.1%) or by lowering the 10 year JGB yield target of 0% +/- 10bp.”