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Kristina Frunze

22 December 2016

Forex Technical analysis

UBS USD outlook 2017: 3 Reasons to short USD now

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UBS USD outlook 2017: UBS Adrian Zuercher believes that the USD is currently overvalued. Moreover, he stated it might be the high time to short USD.

22 December, AtoZForex The greenback has rallied since the America chose Donald Trump as its new President. Last week, the US dollar has reached 103.560 against a basket of six major currencies, marking its highest level in 14 years.

UBS USD outlook 2017

Yesterday, USD rally began to lose its steam. The USD was trading relatively lower against Japanese Yen and the EUR on Wednesday as investors lock in profits from the recent greenback rally.

Now, markets might be pricing in further gains for the US dollar. However, Adrian Zuercher, the head of the asset allocation for Asia at UBS, believes that it is high time to short USD.

The USD has been receiving support not only from Trump’s victory recently. The Federal Reserve’s (Fed) decision to increase the interest rates by quarter percentage provided further support for the greenback. Moreover, Fed decided to change its interest rate outlook for 2017, thus planning as much as 3 rate hikes in the upcoming year. Mr. Zuercher has stated:

"We actually think the U.S. dollar is highly overvalued at this stage and particularly over the past couple of weeks. The rally is unjustified."

Moreover, Mr. Zuercher said that the USD is currently overvalued versus G10 currencies. Specifically, he stated that the US dollar is 15-20 percent overvalued against the EUR and 30 percent against the Japanese Yen. He believed that Trump’s agenda will most likely trigger inflation, thus pushing up the US interest rate and backing the USD.

Why consider Short USD?

EU and Japan inflation

Mr. Zuercher sees a flip side to the situation in the market. He stated:

"We also think inflation in Europe will go up, inflation in Japan will go up and they will start to reduce quantitative easing, which should be positive for these two currencies.”

The Bank of Japan (BoJ) has indicated that its bond-buying program might ultimately taper. The BoJ has shifted its policy focus to a yield-curve control, setting its target for the 10-year Japan government bond yield at zero. This would imply that the BoJ can purchase fewer bonds, as it would only need to buy when the yield curve shifts away from the set target.

Trump threat

The US government would also eventually drag the USD optimism down, according to Zuercher. He has commented:

"If Mr. Trump wants to spend more, he has to finance it, so fiscal deficits should become more negative. That's historically not something positive for a currency, also not for the U.S. dollar, and I think this will also start to weigh on the currency."

No third Fed rate hike in 2017

Furthermore, Zuercher highlighted that the market was already expecting two Fed rate hikes for 2017. This implies that the greenback might not rise in case the third hike does not take place.

Think we missed something? Let us know in the comments section below.

USD Donald Trump Fed rate hike

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