USD: Pockets of consolidation in the Trump reflation narrative emerging - Westpac

US curve steepening trend has faded, Italian sovereign spreads have stabilised, so too have Bund-Tsy spreads, notes Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“Against that the USD index might ease back to 100 but it will likely prove shortlived, not least because if yields top out here this will prove to be one of the smallest and short-lived sell-offs in recent history (yields rose +100bp over 6-12mths amid QE2 and the taper tantrum).”

“Failing that, a near laundry list of other USD positives should sustain gains deep into 2017 including: 1) another HIA, though there are doubts about how much of the $2.4trn in offshore earnings are non-$; 2) a more hawkish composition to the Fed’s Board when Trump fills key vacancies; and 3) “EMU break-up tail risks” due to 2017 European elections.”

“Key risk to an otherwise punchy outlook targeting 105 in the USD index on a 6- 12mth horizon: a mercantilist Trump admin. talks down the USD and tighter financial conditions damage prospects.”