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According to Richard Franulovich, Head of FX Strategy at Westpac, at current levels the USD is notably at odds with the sharp recovery in risk appetite in recent weeks.

Key Quotes

“A long list of potentially disruptive tail risks have diminished recently; the US and China are edging toward a trade-war truce, the odds of a no deal Brexit seem to be declining thanks to the latest maneuverings by the UK parliament and PM May and China’s stronger credit aggregates and the prospect of more fiscal and monetary easing from authorities there is helping guard against hard landing concerns for China.”

“The Fed’s decision to incorporate patience and flexibility into its reaction function, partly as a result of some of the aforementioned risks, has also been a key factor helping risk appetite regain its footing. The US debt ceiling has been re-imposed but the Treasury Department has announced maneuvers to prevent the US from breaching the ceiling that should last through to late Q3/early Q4 this year.”

“As the probability of various known unknowns has declined market based risk measures have fallen sharply.”

“There have been some pockets of USD weakness (e.g. vs CNH) but on a broad trade weighted basis the USD remains near cycle highs and well above levels one might assume it “should be” trading given the recovery in the risk environment.”

“The idea that the USD retains resiliency because growth expectations and yields have also fallen markedly elsewhere (e.g. the Eurozone and China) doesn’t completely fit the facts either since USD yield support and the magnitude of US economic outperformance have waned in recent months.”

“The USD’s resilience is thus not well explained. That said, there is a long history of “late Fed cycle USD strength”.”