According to Richard Franulovich, head of FX strategy at Westpac, the US economy has lost some of the impressive immunity from global uncertainties it had been showing last year and earlier this year which is problematic for the USD because that resilience has been the key to the growth divergence theme that has underpinned its strength.
Key Quotes
“Admittedly business investment – a key area of fragility and a focal point for the Fed amid global uncertainties – seems to be holding up OK. May durable goods orders for example showed encouraging underlying resilience. But against that a broad range of soft surveys have weakened notably in recent weeks. Taken at face value they point to a period of sub-trend growth.”
“The bad news is that the June data round is not complete and the risk is that some key data points like ISM and payrolls – due next week – could underwhelm. That would likely trigger one more lunge lower in the USD (DXY low 95s).”
“The USD should generally mimic these trends: i.e. some residual weak data near term leaves it on the backfoot (DXY 95) but a likely stabilisation of the surveys next month will help the USD stabilise too.”
“There’s another reason we shouldn’t get too carried away with USD weakness; markets price in 75bp in Fed cuts this year and 115bp by end 2020 – aggressive unless you’re forecasting a material slowdown.”
“Admittedly the sugar rush from Trump’s fiscal stimulus is mostly behind us and expectations for both the Eurozone and China have moderated a lot in the last year but any Fed is easing would be aimed at underwriting what remains a decent growth path close to trend and prolonging the recovery, ultimately good news for the USD.”
“The DXY index may not ever get back to the high levels around 100 but its outlook still remains decent. The list of currencies that could capitalise on any USD weakness is in any case very short.”
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