USD: Near term outlook clouded - Westpac

According to Richard Franulovich, Head of FX Strategy at Westpac, near term USD clouded by competing political risks including the impasse over Italy’s budget (the stalemate set to extend, neither markets nor ratings agencies forcing a more immediate resolution) and US midterms, where potential Democrat gains could taint Trump’s pro-growth agenda.

Key Quotes

“A Dec Fed hike is almost fully priced too and fuel for a fresh USD up leg seems spent with investors clearly overweight the US outperformance thesis via the USD and equities.”

“But beyond that, the fiscal-fueled US outperformance narrative has not run its course. Regional PMIs are admittedly cresting but remain near highs while housing is weakening under higher rates and less favourable tax treatment.”

“Average hourly earnings and the ECI both likely breach 3% in coming months and US10yr yields likely hold current ranges, underwriting more medium term USD upside.”