USD As Funding Currency: Attractive No More


In BNP Paribas’ opinion, the greenback is not the most attractive funding currency for a re-establishment of carry positions towards the end of 2013. The forex brokers believe that the US money-market remains above JPY and CHF funding rates. It has been at a premium to EUR cash rates since the onset of 2012 and slightly lower than GBP rates .

Push Back

The Fed remains focused on an exit from policy accommodation and the risks to US rates are very much skewed to the upside from existing levels. The slow improvement in the US economic data is expected to manifest in the succeeding months must be enough to maintain this theme, even if actual tapering of asset purchases remains very much a lingering first quarter issue.

The Bank of Japan and the Swiss National Bank are on hold and are subject to render sufficient liquidity to secure near zero rates for the future. The ECB continued to show some interest to further offer some comfort and not rule out a more dovish tone from the Bank of England if the UK economic data will fall. Forex brokers are confident that that favourable carry trade environment does not signal that the USD will weaken anytime soon as against the core G10 currencies.

So technically, Barclays believe that a derivatives based FX measure of risk adjusted carry trade suggests EUR is generally more efficient fund provider as compared to the USD , mostly for yield plays. This took advantage to lower rates of the EUR and mostly lower EUR cross vols.

Shorting the USD

The positioning of forex brokers is believed to be mitigating against further USD downside versus most core currencies. BNP Paribas believes that the long position on the EUR and GBP is already nearing its highest levels of the year, while the market went to place short position on the USD in late September for the first time in 2013.

The forex brokers still notice that the economic data disappointment deprived the dollar of a catalyst for position reversal. Hence, this leaves forex brokers like BNP Paribas to be reliant on dovish statements from other G10 central banks to push for a short rally in the USD towards the end of 2013. BNP Paribas is keen to achive its bullish forecast on the USD versus the JPY, CHF, EUR and GBP. They would want to focus their attention on the statements that will be made by the ECB policymakers.

There has been some shy discussion of gains in the EUR with regards to the exchange rate in comments by council member Ewald Nowotny on 11 October. Economists believe that ECB officials will commence to articulate more strongly on this issue in the succeeding weeks. Forex brokers are keeping their radar screen on the policy speeches and the ECB meeting this coming November as the main event risk for EUR/USD long positions.

Upside Surprises

Though still, the USD is still under pressure versus the G10 currencies despite as the high yielders are struggling. The disappointing weekly jobless claims and a weaker PMI added to the drama set by last week’s jobs print.

BNP Paribas further expects that September durable goods print to conclude the week with same dim result with its forecast of plus 0.2% for ex transport orders lower than consensus estimate of a 0.5% rebound after last month’s 0.1% decrease. They also anticipate more weakness in the Michigan sentiment survey. Consensus estimate of economists predict the headline index to slide to 72.5 from the preliminary 75.2 reading. Although they believe that reviving the fed tapering expectations is challenging enough, they would expect the US dollar to be more sensitive to the coming economic data surprises instead of the slight downside misses that their analysts forecast. Hence, they expect the greenback to gain against low yielding G10 currencies in the coming forex calendar weeks.


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