The price action in the US dollar over the past 12 months coupled with the economic developments leaves us with an expectation of U.S dollar strength in the medium term. Headline domestic data continues to strengthen in the U.S, although we’re not blinded by this and recognize the underlying weakness in some of the less prominent indicators.
I anticipate Dollar strength will come from the pricing in of higher yields as growth and inflation materialize as signaled in the latest ISM reports. Add this to Tax Reform developments that are giving hope to another economic boost and we have a bullish USD scenario that stems for ‘growth’.
However, there is a second scenario whereby the complacency in the market that has seen the S&P 500 rally to all-time highs with historically low levels of volatility, becomes an unwind scenario that sees USD strengthen on safe-haven flows. The catalyst for this type of risk off scenario comes in the form of geopolitical uncertainty (North Korea and Trump), or even the QE reduction plan ready to be implemented by the FED.
I use CFTC positioning data as a contrarian indicator and currently supports my long USD thesis. Despite resilient U.S data CFTC non-commercial short USD positioning looks to be ‘overstretched’. Looking at the likes of AUD and GBP and we see net positions remain very long, putting both at risk of unwinding.
Chart Source: ANZ Research
I have a bearish bias on AUD/USD and GBP/USD in the coming months.
AUD/USD 1 to 3-month objective: 0.7550
GBP/USD 1 to 3-month objective: 1.2800
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