USD: Driven by multitude of factors – Westpac

Sean Callow, Research Analyst at Westpac explains that last week they argued that conditions were ripe for a bounce in the US dollar, even if it was mostly about positioning and expectations and suggests that the rise in the US dollar against 8 of the G10 currencies is not too startling.

Key Quotes

“In particular, the low level of our US data surprise index warned that market consensus was probably too gloomy. Hence markets were not well positioned for strong data such as July non-farm payrolls, July small business optimism and June job openings (6.16mn, a record high).”

“So the rise in the US dollar against 8 of the G10 currencies is not too startling. But the week’s key themes of course extend beyond the firmer US data that is keeping the Fed optimistic about the outlook. This is clear when we consider the 2 currencies that have not fallen against USD this week – the Swiss franc and Japanese yen.”

“With a negative yield on benchmark policy interest rates, CHF and JPY clearly retain their traditional status as safe havens. We noted last week that FX volatility measures were very low and this remains the case, though S&P 500 equity volatility benchmark VIX printed one month highs this week. This came in the wake of an escalation in rhetoric over North Korea.”

“Bombastic threats from Pyongyang are familiar, but normally don’t prompt a response from the US. This week however, President Trump matched Marshal Kim Jong-un’s “sea of fire” line with “fire and fury”. We do note that the fall in global equities and flight to CHF, JPY, gold and US treasuries needs to be kept in the context of a huge rally in risk assets this year.”

“But the combination of firmer US data relative to consensus and a rise in geopolitical tensions is difficult for pairs including AUD/USD and NZD/USD where lopsided positioning amplifies risks of at least a near term correction. It’s hardly an inspiring foundation for a US dollar rally but for now it may have to suffice.”