Sell U.S. Dollar Strength to Buy Australian Dollars and Sterling says Standard Chartered

Any rebounds in the U.S. Dollar should be temporary say strategists at Standard Chartered, who say any bounces could be used as an opportunity to buy into other currencies such as the Pound, Euro and Australian Dollar over the course of 2021.

In a weekly briefing note to clients of Standard Chartered’s Wealth Management division, analysts say a recent rally in the value of the U.S. Dollar should prove to be relatively short-lived and that the broader trajectory lower is likely to remain intact.

“The USD, another contrarian measure of global risk sentiment, has started to rebound, raising concerns that further gains could tighten global financial conditions. However, we see the gains as temporary amid limited prospects for a significant rise in U.S. bond yields, widening US fiscal and current account deficits and an improving global economic outlook,” say analysts in the briefing.

The Dollar rose against a host of major currencies last week, driven primarily by expectations that the Federal Reserve will need to consider withdrawing its stimulus earlier than many market participants and analysts had been initially expecting.

The rebound in the Greenback pushed the Pound-to-Dollar exchange rate back to a low of 1.3520, having been as high as 1.3710 earlier in the week. The Australian-U.S. Dollar exchange rate pulled back to 0.7659, having been as high as 0.78 in the first week of 2021.
The Euro-to-Dollar exchange rate retreated back to 1.2050, with numerous technical analysts warning that a test of the psychologically significant 1.20 barrier was highly likely once more.

But, analysis from Standard Chartered say any strength in the Dollar could allow investors to dip into the Australian Dollar, Euro and the Pound.

“Technical charts suggest EUR/USD has strong support around 1.2000. A near-term USD bounce should create opportunities to move to EUR, AUD, GBP and CNY,” say economists at the Asia-focussed lender.

And, any setbacks to investor sentiment – that typically play into the Dollar’s ‘safe haven’ credentials – could mean opportunities for investors in other asset classes.

“We believe any correction in risk assets in the coming days would be an opportunity to add to our favoured EM asset classes, in addition to US equities. It would also present a chance to tilt equity allocations increasingly towards Value-style stocks and consider adding exposure to some of our multi-year themes around innovations in medical technology, Internet-of-Things, electrical vehicle technology and “green infrastructure,” says Standard Chartered.
A bullish indicator that analysts have picked up on – which is encouraging for longer-term investors – is that market breadth (the number of stocks in the index above their respective 200-day moving average in the S&P500, Europe Stoxx 50 and UK FTSE 100) is improving.

“In our view, the broadening of the rally internally (within indices) and globally (a synchronised improvement in market breadth) raises the likelihood that the uptrend continues,” says Standard Chartered.

Accordingly, analysts say they expect the U.S. Dollar to move lower through 2021, but also expect short-term rebounds along the way.

From a strategic perspective, Standard Charted say potential investors looking to benefit from future USD weakness could consider “averaging in”.

“Buying EUR/USD at 1.2060, 1.2000, 1.1890 and 1.1780 support levels would generate an average rate of 1.1955, for example. This would be an attractive average given our year-end EUR/USD expectation of 1.3000, especially since we do not expect a decline much below 1.1600,” says Standard Chartered.
This strategy could also be deployed against other currencies, including the Pound and Australian Dollar.

Analysts say the Pound has been slow to follow the recent fall in the Euro, but if the Dollar does correct higher, the Pound will likely be dragged lower.

“We look for GBP/USD support around 1.3460, 1.3300 and 1.3190, expecting 1.3000 to hold, with expectations of 1.4000 in 2021,” says Standard Chartered.

Concerning the Australian Dollar, AUD/USD has also been well supported in their view, amid a bullish commodities outlook, though tensions with China could impact exports.

“We would look at AUD/USD supports at 0.7625, 0.7510 and 0.7410 as levels to accumulate the AUD, expecting the pair to hold above 0.7200, with a medium-term expectation of 0.8000,” says Standard Chartered.