Weekly Forex Report

Although a near consensus view, we are of the belief that the US Dollar will continue to gain favour in 2014. We see a large multi-year base forming in the US Dollar index. Despite plenty of Dollar negative scenarios that have played out over the last 10 years we have failed to break meaningfully lower in the index. This is the kind of price action that we seek, to signal a lasting base. We are also aware of the fact that almost 60% of the index is made up by EUR/USD. Thus in order for the US Dollar index to rally meaningfully, we will need to see more participation via EUR/USD weakness. For this to take place from a fundamental perspective we would need to see a less deflationary backdrop in the Eurozone. As discussed later in this report, we see scope for some near-term improvements in sentiment towards the Eurozone periphery. The big question is whether or not any such improvements can be sustained and build up a momentum via durable GDP growth. We watch for this to potentially be a major upside surprise for the US Dollar. We liken this scenario to that seen in Japan this year. As perception of an end to deflation became entrenched the Japanese currency weakened. Perhaps that same could be true for the Eurozone and EUR/USD weakness, in a somewhat counter intuitive way!