A dollar trend is developing - Nomura

Analysts at Nomura explained, at last, a dollar trend appears to be developing. 

Key Quotes:

"This month, the dollar has rallied against almost all currencies including emerging market ones. The broad trade-weighted dollar is close to its post-2008 highs last seen at the turn of the year.

Undoubtedly what has helped is a monetary policy divergence story between the Fed and its peers. US core inflation is between 1.7% and 2.2% depending on which measure one looks at, and the unemployment rate is below 5%. This provides the right backdrop for the Fed to hike in December and for the market to price hikes for 2017. Meanwhile, the ECB has made it clear that it would not allow an abrupt end to its bond buying scheme, and so has put paid to the notion that it was about to taper. The BOJ has also engineered a shift in policy target to allow a more prolonged period of easing than under a quantity targeting approach.

One factor that could further bolster the dollar would be a Clinton victory, not least because it would bring about continuity in economic arrangements between the US and the rest of the world. With US data surprise indices appearing to be basing after a poor run since August, the probability of a run of upside surprises into year-end is already high. A Clinton victory could add further fuel to that. Indeed, US cyclical stocks have been following the ups-and-downs of the likelihood of a Clinton victory.

As for currency pair specific dynamics, we find that euro-area investor repatriation flows, especially in equities, appear to be coming to end, while bond outflows continue. This dynamic has been a stubborn support for the euro for much of the past year, but is unlikely to be so in the future.

On the yen, we expect Japanese institutions to reduce their hedge ratios as hedging costs are higher than before. There are also more signs that Japanese investors are buying foreign equities. A less-discussed factor is the decline in Chinese buying of Japanese assets, which may well have been part of a reserve rebalancing programme earlier in the year. It likely helped yen strength over that period, but as with euro repatriation, this flow will not be forthcoming."