US fundamentals remain supportive for a stronger USD - MUFG

The US dollar has remained on a weaker footing in the Asian trading session after the dollar index fell back towards support at the 100.00-level as noted by the Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The correction lower for the US dollar in the near-term is likely to prove only temporary with no clear fundamental justification for a sustained reversal of the stronger US dollar trend. Long positions have likely been lightened after the US dollar failed to build on recent gains following the Italian public’s rejection of constitutional reforms. The broad financial market fallout has been limited with Italian banks bearing the brunt of the initial negative market impact reflecting concerns that they will find it more challenging to raise private funds to recapitalise.”

“Fundamentals still remain supportive for stronger supported by the widening of yield spreads in the favour of the US. The release yesterday of the latest ISM non- manufacturing survey signalled that the US economy is continuing to expand more solidly heading into year end. The survey revealed that business confidence rose to its highest level since October 2015. The composite ISM reading for November appears consistent with economic growth of between 2.5% to 3.0% in Q4.”

“The employment sub-component was even more encouraging rising to 58.2 in November signalling that employment growth is likely to accelerate and is more consistent with robust job gains of over 200/month. It supports our view that the November employment report could have again under reported employment growth which is likely to be revised higher in time. The November employment report revealed an even tighter than expected labour market with the unemployment rate dropping sharply to 4.6%. At the current juncture, we are more inclined to view the softer earnings growth as temporary within a strengthening trend. A tighter labour market supports our view that the Fed will have to speed up the pace of rate hikes in the coming years offering more support for the US dollar.”

“Fed Vice Chair Dudley has described the markets’ view for a faster pace of rate hikes over time as “logical”. He stated that it is too soon to say how President elect Donald Trump’s plans will affect the outlook for Fed policy although he did describe the markets expectation for fiscal stimulus as “reasonable”. Interestingly, he emphasized that it was “important to distinguish between a tightening of financial conditions that is driven by an increase in risk aversion from one that that is driven by a greater likelihood of stronger near-term aggregate demand and less downside risk to the growth outlook”. The recent rise in US yields and the US dollar is seen as a more favourable tightening of financial conditions and as a result is less likely to dampen the pace of Fed rate hikes going forward.”