BENGALURU: The reflation trade that spooked currency markets and threw them into disarray will be in play for at least another month, according to a Reuters poll of strategists, who were still holding on to their outlook for dollar weakness in the long run.
Benchmark US Treasury yields vaulted to their highest since the pandemic began last week on improving economic expectations and inflation concerns, what has become known as the reflation trade.
That dramatic surge in bond yields, which knocked global stocks off their record highs, has challenged overwhelming bets against the dollar, with the currency up over 1% this year.
While recent moves have confounded analyst expectations for a weaker dollar in 2021, the March 1-3 poll of over 70 foreign exchange strategists showed the consensus for broad dollar weakness in a year was still intact. But a majority, 50 of 65 strategists, in response to an additional question predicted moves in currency markets based on an upswing in economic activity and prices, or the reflation trade, would continue for at least another month, including 33 who said over three months. “There is this battle going on now between the pricing-in of this reflation trade and on the other hand the central banks just wanting to temper the pace of the optimism,” said Jane Foley, head of FX strategy at Rabobank.
“We’ve got this period of struggle between the bond markets and the other central banks trying to keep optimism from getting too significant - and in that period what we might see is the dollar being a little bit more resilient than the consensus has been expecting.” Despite those predictions for dollar resistance in the near-term, global stocks were forecast to continue their rally over the coming year, according to separate Reuters polls of equity strategists and investment managers.
The euro, down more than 1.0% this year, was forecast to trade at $1.21 in a month, around where it was on Wednesday. It was then expected to reverse trend and gain over 3.5% to $1.25 in a year. Sterling, up over 2%, was forecast to change hands at $1.42 in a year, a further 2% gain from just below $1.40, where it was trading.