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Originally Posted On: MUFG: Overvalued US Dollar Set To Weaken Further, Norwegian Krone Has Scope For Strong Gains (exchangerates.org.uk)
The US dollar weakened sharply to 30-month lows on the last trading day of November before a corrective recovery and MUFG expects further losses. All G10 currencies except the New Zealand dollar are under-valued and the Norwegian krone has the most scope for gains, especially with oil prices set increase.
US dollar vulnerable to further losses
According to MUFG, fundamentals will not provide short-term dollar support.
“Rising and exceptionally high COVID infections in the US and a vacuum on fiscal policy support probably through to February-March means there is a clear spell ahead of global growth out-performance versus the US as recoveries outside the US unfold sooner.”
MUFG also notes that, unusually compared with recent year, the US S&P 500 index has under-performed relative to other major global bourses.
This trend is likely to reinforce the potential for dollar weakness in the year ahead and the dollar is also overvalued against most major currencies.
Norwegian krona poised for strong gains
According to MUFG; “We see compelling reason to expect NOK out-performance next year.”
MUFG expects oil prices to make significant gains next year and the krone also has other attractions; “ It is also one of most under-valued based on PPP estimates. Taking our own PPP estimate and the Consensus Economics estimate, USD/NOK remains around 25% from fair-value.”
The dollar-to-krone rate dipped to 12-week lows below 8.80 on Monday before a limited correction.
The pound-to-krone rate hit 10-week lows below 11.75 before a recovery.
The Swedish krona is also undervalued by 22%, although it expects that uncertainty over Riksbank policy will limit scope for further strong currency gains.
Although the Canadian dollar is undervalued by 9.2%, MUFG expects the likely dovish Bank of Canada policy will limit its attractiveness.
The bank estimates that Sterling is undervalued by 13%, but it has important reservations over the UK outlook.
“While an EU-UK trade deal will propel GBP higher, the relative macro backdrop means GBP could still under-perform next year.”
The New Zealand dollar has attractive fundamentals, but according to MUFG, the currency is now the only G10 currency overvalued against the US dollar, limiting the scope for further gains.