USD: Taking a breather - Westpac

Imre Speizer, Research Analyst at Westpac, explains that after a strong run during the past month, the US dollar has taken a breath and the 15 Mar FOMC decision is the key US event this week (datawise we have CPI, retail sales and the early March PMIs, which should be overshadowed).

Key Quotes

“A 25bp Fed hike is assured, with markets pricing a 100% chance of such. More interesting will be the dot-plot projections of the Fed rate. The median projection of 3 hikes in ‘17 is unlikely to change, since a majority 4 of 6 members at the median would need to turn more hawkish. That said, the distribution is likely to shift in an upward direction (at the Dec meeting, 6 saw fewer than 3 hikes in 2017, while 5 saw more) given the recent upbeat Fedspeak. In her commentary, Yellen is likely to stress gradualism and “moderate” growth.”

“USD yield support has come a long way but it’s still not spent: markets have mostly just front-loaded hikes, +70bp priced by end-2017, which is still shy of the 3 hike median. The Fed’s tone and a material shift in the dot plots will have a large bearing on which way the USD reacts on Wed. We see the risks as skewed to the upside.”

“3 months: We suspect the USD will falter in summer when it becomes clear that meaningful tax reform will run afoul of challenging political realities: even if Senate filibuster risks can be avoided by using the 2018 reconciliation bill (where only a simple majority is needed) great swathes of the Republican party remain lukewarm on infrastructure, border adjusted taxation and funding spending plans by gutting government agencies.”