There are two building blocks to our ongoing bullish USD call for 2014.
First, US monetary policy and associated fixed income inflows. This year has been allabout pricing out QE, with the US curve bear steepening to extremes and treasuryinflows suffering as a result. Next year we think it will be all about US short-end yieldsmoving higher and bear flattening. Flattening has historically been exceptionallysupportive for the broad USD, as more stable long-term yields support a return of fixedincome inflows and the attractiveness of the dollar as a funding currency diminishes. Putin other words, we don’t think the Fed hikes in 2014. But just as the market front-ran theend of QE this year even though it will happen in 2014, we think next year will all beabout short-end re-pricing even if Fed rates don’t go up until 2015.
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Deutsche Bank