We have stated repeatedly we expect the US dollar's decline to become disorderly in the near future, starting here.
“For the past 9 months Asian reserve managers have controlled the direction and to an extent the pace of USD weakness, whether valued in terms of the USD/Index or the EUR/USD. 3 months ago they were joined by Latin American Central Banks as they sold the USDs that they were buying each day to keep their own currencies relatively weak on an export competitiveness basis.
The Latin American and Asian Central Banks have been happy to work bids in the market, passively adding liquidity rather than taking it. They have done this by working bids below the market, relying on the market to come to them as peripheral fears, and interest rate differential changes result in bouts of USD strength. This passive strategy of USD selling has worked for some time, and the players have been content with the pace of the move and the liquidity they have been absorbing. The game has changed
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Middle Eastern reserve managers have now joined the party; and their strategy is not passive but rather aggressive. Middle Eastern reserve managers seem to pay offers and chase the market higher. When the EUR/USD rallies 30 pips on air you can be assured this is a Middle Eastern reserve manager diversifying out of the USD they have received from the higher oil price. Note that OPEC will receive a record 1 Trillion USD this year. Middle Eastern reserve managers have little interest in staying long these USDs given the current state of the US economy and the Fed's continuation of QE2.
The Middle East has changed the game because they are forcing Asian reserve managers to question their passive strategy. If Asian Central Banks are passive, they miss buying the EUR/USD at 1.4040, because the Middle East is front-running their orders. This has caused a number of Asian reserve managers to raise their bids in the EUR/USD as the market rises. In effect, through frustration, Asian reserve managers are moving from set bids to rolling bids...i.e. set a bid 50 pips below today's high... This strategy could see faster moves to the topside in the EUR/USD in the months ahead. It could certainly steepen the slope.
We find it especially interesting that Brazil allowed the BRL to strengthen to 1.6280 today, just as Brazilian and Chinese relations have recently warmed, specifically regarding the issue of the Yuan, but also given that President Rousseff's first state visit will be to China on April 11th. We believe the only reason Brazil is allowing the BRL to strengthen is because they expect China will do the same going into the G20 meeting on April 14th. Further CNY strength equates to further USD weakness. We continue to call for 1.5000 in the EUR/USD over the next 3 months. The game has changed.”
