USD: some cracks but nothing serious – Westpac

Analysts at Westpac explained that  other than squaring up a modest short EUR position the model is content to stick with most of the same core bets that have been in place in recent weeks, namely; long USD and JPY, short AUD and NZD and long CAD.

Key Quotes:

“Last week we observed that the high USD is not yet a serious headwind to either growth or inflation and as a result shouldn’t encounter any meaningful resistance from US policymakers.

A quick stock take of some other key metrics confirms that while there may be some short term vulnerabilities – mainly positioning and a mature cycle of US data outperformance – the underlying uptrend appears to be intact.

1) Outright yield, and linked to that, valuation remain the key plusses. As the slide over shows despite the USD’s 6% appreciation since mid-April it remains well shy of levels implied by yield spreads.

2) A broad model that incorporates relative growth, relative budget balances and the US’ terms of trade in addition to yield spreads confirms that the USD has valuation on its side. As of end-Q2 the USD index remains around 10% below equilibrium (see slide two).

3) On the cautionary side; global growth conditions remain somewhat negative USD. Admittedly there is still some caution about the Eurozone outlook; a handful of PMIs have stabilised but underlying momentum lacks the vigor of 2017. Weaker China imports, IP and credit have also raised doubts about growth momentum in China too. Against that the OECD leading indicator still overall points to continued global expansion, albeit modestly (see slide three). The USD tends to trade inversely with global growth and as such there is a limit to upside potential as long global growth continues to firm.

Our US data surprise index has begun to normalise from unsustainable highs too. As slide four shows investor exposure to the USD loosely tracks the broad cycles in our US data surprise index and if anything looks vulnerable given our surprise index has begun to track lower.”