US: Fiscal deficit likely to be an underlying negative factor for the dollar – MUFG

Analysts at MUFG Bank see the US dollar remains in range. They warn that the fiscal burden of the US could be a negative factor for the greenback in the future as the deficit reached 11.8% in GDP terms and is estimated to climb to 18.7% in 2020. 

Key Quotes:

“Last week we decided to tone down our short-term USD bullish view given the remarkable ability of the markets to ignore the numerous short-term risk factors. That ability is still evident although the US dollar has strengthened this week and the S&P 500 is 1.4% lower as those downside near-term risks get a bit more attention. NOK and AUD are the two worst performing G10 currencies this week while JPY and CHF are the two best performing – a classic risk-off type performance mix. With President Trump back on the road this week, the gap in the polls has narrowed a bit – 5 days ago Biden’s lead was 10.3ppts according to Real Clear Politics and today the lead has narrowed to 9.4ppts.”

“The IMF estimates that the Fed purchased 57% of debt issued since February. That may well have to increase going into next year with the debt outlook worsening at a time when inflation will be picking up. Our US Rates analyst forecasts the core PCE annual rate picking up to 2.2% by June. If the Fed commits to capping yields, at least through 2021, the result is likely to be s sharp move higher in inflation expectations.”

“The US dollar is on shaky foundations. Near-term risks are limiting appetite for USD selling now, but that will change, possibly once we are beyond the US election.”

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