USD continued to grind lower due to soft patch in the US economy in Q1 - Westpac

Imre Speizer, Research Analyst at Westpac, explains that the US dollar has continued to grind lower this year, partly due to a soft patch in the US economy in Q1 (although the Fed has deemed it “transitory”).

Key Quotes

“Also acting as a headwind has been the overhang of extreme long speculative positioning in US dollar. There were signs such positioning has started to reduce, but it has some way to go before reaching a neutral state.”

“In this week’s event calendar, we have the early business surveys (Philly, Empire and NAHB), housing starts and IP. The Fed’s Bullard and Mester speak.”

“3 months ahead: Trump’s reflationary policies already faced significant obstacles, notably the challenge Republicans have in finding a consensus that satisfies both House conservatives and centrist Senators. The deepening scandal around “Russiagate” raises the political obstacles yet further, both as an all-consuming distraction and by reducing the president’s political capital/support in Congress. Political risks surge yet further in September when a new government funding bill is due and the debt ceiling comes into play.

That said, by year-end, NZ-US interest rates spreads should be much lower, and the Fed’s intentions regarding balance sheet normalisation should be clearer. Markets should eventually start to price balance sheet shrinkage into the US dollar.”