USD unlikely to strengthen significantly at the moment – Scotiabank

USD quiets down ahead of a long weekend for many. Shaun Osborne, Chief FX Strategist at Scotiabank, believes that narrowing short-term spreads will weigh on the greenback.

Yields and yield spreads remain a key influence over the USD’s performance

“Slower growth fears weighed on stocks and have extended the USD some haven demand. I doubt the USD can strengthen significantly at the moment, however.”

“Slowing growth momentum plus concerns about the impact of credit tightening on the economic outlook have prompted a significant rally in red pack Eurodollar futures — implying markets anticipate significant (more than 200 bps) Fed rate cuts two years hence. Markets anticipate (currently, at least) much smaller rate reductions in the UK and Eurozone over that timeframe. Narrowing short-term spreads will limit the potential for the EUR to weaken and, ultimately, weigh on the USD.”