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The major currencies are ranked as follows in terms of the current mindset

Generally Bullish CAD, JPY, GBP
Generally Neutral AUD, EUR
Generally Bearish USD, NZD

Once the currencies markets start to focus on what inevitably in the long-run drives currencies, it is likely that the NZD in particular, but also the USD will fall. Both New Zealand and the U.S. have dreadful currency fundamentals – recessions that a deep and protracted, current account imbalances that are wide and the fiscal position and level of government debt are a problems, especially as both countries are so heavily reliant on foreign investors to fund budget and current account deficits. The more bullish calls – CAD, JPY and GBP – are linked to a mix of current account positions,domestic saving levels and even a reversal of market positioning.

Where to now?
While the current economic and market turmoil seemingly has some time to run, currency markets will be looking for an eventual return to more normal conditions and in doing so, will start to position for those longer run currency moves.
Paramount, will be renewed USD weakness. The demise of the USD is premised on poor domestic savings, a massive fiscal imbalance and a heavy reliance on foreign inflows. These are unlikely to turn around within 3, maybe even 5 years. They could indeed get worse before they get better. In such circumstances, it is difficult to see USD sustaining a long run appreciation.

To be sure, most other countries have some very ugly fundamentals, but in all cases outside the U.S. and New Zealand, there is at least one virtuous aspect of their economic performance. In Japan, it is domestic savings and the current account balance; in the Eurozone, it is also savings and the current account balance – and in addition, the fiscal deficits are relatively small. These trends may well help the EUR to be a strong currency when the dust finally settles from the current recession.

In many ways, the long run fundamentals are not all that helpful when it comes to trading – they take a while to kick in and in the short term, can be swamped by flows, sentiment, fashion and herd mentality. But in the medium term, they do
work.

As such, we see no reason to materially change the bearish USD call.