USD: In Yellen We Trust – Credit Agricole

The USD has consolidated in the first two weeks in June. This comes on the heels of a solid 2.4% rally in May based on the DXY.

The recent weakness reflects largely positioning squaring, especially in the bond market where stretched valuations and one-sided trades continue to dominate price action.

That said, the May retail sales report followed the steady drumbeat of solid US data releases, sparking the recent uptick in high frequency US data surprises. Indeed, the report was much stronger-than-expected even considering the rise in headline. The core figures and the retail control group both beat expectations and saw backend revisions.

This argues that Q2 started off on a stronger footing than previously thought. At the same time it bodes well for consumption growth, which remains the key source of growth for the US economy. This stems from soft patch in investment spending and exports given the one-two punch of the oil price shock and the 9- month surge in the greenback. The solid retail sales reports support our conviction that the US recovery bounced back smartly in Q2.

The strength of the May employment report and rebound in construction, auto sales and trade over past few weeks reinforce our call for a solid pickup in US growth after the Q1 slowdown. Our read of the April data suggest the economy continued to grow above trend at 2.4% (QoQ SAAR).

Thus, we like sticking with the stronger USD theme, especially ahead of the Fed meeting next week. We favour it against currencies with large external deficits and valuation issues. In this regard, both G10 and EM have currencies that fare poorly on these metrics but BRL, COP, RUB and CHF are the key ones that stick out and should underperform.