Credit Suisse Calls New US Dollar Bear Market to Last for Years

Jon C. Ogg

Not that long ago, the strong dollar was hurting the earnings and revenues of many of the top international companies based in the United States. And it is well known that having a weaker currency drives up a nation’s ability to sell internationally. Now the U.S. dollar is weak again, and Credit Suisse has warned that the weakness is here to stay for some time. In fact, the firm has outlined how much more dollar weakness can be expected against the yen, euro, pound and other currencies.

Andrew Garthwaite and the members on the Global Equity Strategy team at Credit Suisse have a published a report showing that the U.S. dollar is entering a secular bear market. The report points out that dollar has tended to move in long-term cycles, with the average bull market lasting six to seven years and the average bear market lasting nine to 10 years — and the last dollar bull market from July of 2011 to January 2017 lasted nearly six years. The firm also noted a trough-to-peak appreciation of 43%, and a comparable appreciation to that was seen between 1995 and 2002.

Tuesday’s report further noted that the Credit Suisse FX strategists expect the U.S. dollar to weaken over both the next three-month and 12-month horizons. They are now calling for the euro (EURUSD) to reach 1.22 and yen (USDJPY) to reach 107 in the next 12 months. This implies roughly 3.0% further downside against both currency pairs over the next year.

As a reminder, a weak dollar isn’t just good for domestic companies wanting to export outside of the United States. Credit Suisse noted that a weak dollar is good for global equities until the point at which the Federal Reserve is compelled to react to its inflationary impact. The firm believes that this would require a further 10% depreciation on the dollar, and also that each 10% off the dollar can adds about 5% to U.S. counted earnings per share.

While Credit Suisse is not forecasting an impending bloodbath for the dollar, the team did suggest that speculators are currently only positioned with a neutral level that is not outright bearish. For this reason the team believes that there remains considerable room for further deterioration in dollar sentiment ahead.

Among the factors supporting the euro are valuation, a current account surplus of 3.4% of gross domestic product (GDP) and PMI differentials. The euro is currently being driven by the long end of the curve, and the team noted that the 10-year bund yield has much more upside than the 10-year U.S. Treasury yield. While this is a longer-term view, Credit Suisse did opine that some euro consolidation should be expected in the near term as it looks overbought while speculators are long and U.S. interest rate expectations appear too cautious. On the euro basis, Credit Suisse said:

On a euro area sector basis, banks, real estate and transport are the relative ‘winners’, while healthcare and consumer staples are least attractive. This highlights our overweight of banks, German real estate, and telecoms (the most domestic-oriented non-financial sector) and our recent downgrade of luxury. European stocks with more USD costs than revenues, which should benefit from a weaker dollar and have underperformed since 26 June include: Elementis, Ryanair and Solvay (all Outperform rated). We continue to favour UK euro earners (Vodafone, Bodycote, SThree). We think the Swiss franc will continue to weaken against the euro (our FX team forecasts EURCHF 1.18 in 12 months).

On the British pound, the team noted:

We stopped being GBPUSD bears last October but continue to see sterling depreciating against the euro (given our economists’ modeled probability of a UK recession over the next six months is at 38%, a current account deficit of 4% of GDP, FDI inflows likely to revert lower and a dovish MPC).

On the yen, the Bank of Japan now owns over 40% of the Japanese government bond (JGB) market and Credit Suisse’s economists believe its ownership share will rise to 50% by the end of 2018 — but their economists believe that the Bank of Japan will taper its purchases down to zero by the second quarter of 2020. The team’s 107 forecast noted that they struggle to have a high-conviction view on the yen but see the following two large factors as supportive for the currency along with another factor about speculators:

1) The current account surplus in Japan has rebounded to c.4% of GDP, and we think this is only likely to rise as fossil fuel imports are replaced by nuclear and renewables…
2) On valuation, the yen remains close to the cheapest level ever seen on a purchasing power parity basis.
3) Data from CFTC show speculators currently hold a large net short position in yen futures – the largest net short in over two years, surpassed only by positioning seen around the BoJ’s 2013 expansion of asset purchases.

All in all, this was just a snapshot of a very long, 50-plus page report. Credit Suisse did not really forecast that the U.S. dollar is about to lose its status as the world’s reserve currency. That being said, their view is that a new bear market has started for the U.S. dollar and that bear markets tend to last longer than bull markets.