What to do with dollar? Forecast as of 28.05.2021

It is hard when there is now money, but it isn’t easy when there is too much money. Where to invest the money not to lose it and make profits? Should investors go back to the USA and buy the US assets, or its better to invest to in other countries’ assets? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The road to hell is paved b good intentions. When the Fed flooded the markets with huge amounts of cheap liquidity in the spring of 2020, there was no reason to doubt its good intentions. Save the economy from recession! Support stock indexes! Give people the money they need! Time has passed, the recession has been left behind, but QE continues. A natural question arises, what to do with dollars? Much depends on the answer to this question, including the EURUSD future trends.

Judging by the surge in usage of the Fed’s repo facilities, investors simply don’t know what to do with money. They deposited $485.3 billion in central bank accounts at zero interest rates, exceeding the previous high of $474.6 billion on New Year’s Eve 2015.

Dynamics of volume and rates in repo operations

Source: Bloomberg

And this situation is observed not only in the United States but throughout the world. Due to massive incentives and strong domestic demand, US imports are growing faster than exports. The current account deficit relative to GDP is at its highest since 2008. More and more dollars are falling into the hands of foreign investors. What to do with them? Should they invest in the US markets or buy assets in other countries?

On the one hand, Joe Biden’s intention to increase the size of the US budget and national debt from the current $5.7 trillion and 100% of GDP to $8 trillion and 117% of GDP by 2031 suggests that there will be no shortage of Treasury bonds in the next decade, which contributes to the growth of Treasury yields and the strengthening of the US dollar. On the other hand, why should they need these securities or the S&P 500, whose estimates, including the P/E, are clearly overestimated? According to Goldman Sachs and Deutsche Bank, the current twin-deficit situation is similar to that of 2002-2007, when the USD index was falling. They believe it is only a matter of time before investors start looking for more competitive international assets, which will press down the greenback.

However, Morgan Stanley and Eurizon SLJ Capital believe that current events should be compared to the 1980s and 1990s when the US dollar strengthened in the face of large current account deficits, and BofA Merrill Lynch argues that its impact on greenbacks will be evident later.

Dynamics of USD and US current account deficit

Source: Bloomberg

US dollar bulls bet on American exclusivity and the leading pace of the US growth over the global economy, which will lure investors to the US assets.

Weekly EURUSD trading plan

In my opinion, the arguments of Goldman Sachs and Deutsche Bank look more convincing. The USA may forget about its exclusivity as the last parliaments in the European Union were set to back the ratification of the €750-billion European recovery plan. The ratification of the EU law will enable the European Commission to go to the markets in mid-June to start borrowing cash it will then disburse in grants and cheap loans to all EU countries over the coming years. Therefore, the EURUSD should rally to 1.25 and higher in the medium term. In the short term, the inability of the bulls to hold the price above 1.226 and 1.221 indicates their weakness, which makes it possible to enter short-term sales in the direction of 1.213-1.215, 1.2085, and possibly 1.2045. But traders should be cautious with sell trades.

   

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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