USD: Recent strength to fade – Westpac

According to Richard Franulovich, head of FX strategy at Westpac, the USD is finding fresh gears despite Fed patience and flexibility, but the evolving market narrative is likely to prove more challenging in coming weeks though with headwinds including a potential US-China trade-war truce and a 20 March FOMC where the dots are likely to undergo meaningful downward revision.

Key Quotes

“To be clear, any US-China agreement is unlikely to be a comprehensive one, though it should be enough to de-escalate tensions and placate markets.”

“Chair Powell is likely to continue to stress Fed patience at their next meeting in March and the dots are likely to shift materially lower. The Fed certainly has the luxury to wait; inflation is docile (6m ann core CPE 1.5%) and the supply side of the labour market is improving sharply (prime aged labour participation has jumped +0.8ppts in the last 4mths to a decade high 82.6%).”

“The Fed’s abrupt shift on balance sheet normalisation adds another layer of caution for the USD. Altogether the USD seems vulnerable near term, regardless of its better price action lately.”

“2019H2 looks more fertile for USD upside. A USD pullback in the first half is likely limited to 94-95 an ideal location for fresh longs targeting 100.”