Former head of currency research at Morgan Stanley says world is structurally short USD.
Stephen Jen is one of my favorite currency strategists and when his comments pop-up, they are always worth a read.
He argues that sovereign and corporate borrowers outside the United States borrowed in US dollars to the tune of $9 trillion for foreign obligations and that much of it will need to be converted and paid back in the coming years.
"Short-covering will continue to power the dollar higher," said Jen, who predicts EUR/USD will fall to 0.9600 in three months. "The dollar's strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary."
10 consecutive months of euro declines already
Jen cites BIS data and Bloomberg notes some of the companies that will have to raise US dollars to repay:
Russian gas producer OAO Gazprom, Spanish phone company Telefonica SA and ArcelorMittal, the world's largest steelmaker, have each raised about $12 billion in the U.S. currency since then, data compiled by Bloomberg show. France and Sweden are among the biggest sovereign issuers, borrowing more than $100 billion between the two.
I suspect those borrowers will switch into euros for the next round of borrowing because of much cheaper rates.
"After years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repay" given the currency's recent gains, Jen said. "People will either repay early or start hedging actively. There'll be huge demand for the dollar that is much more than what's consistent with growth or interest-rate differentials."
