USD: Guided by the US-China trade friction - Westpac

According to Richard Franulovich, head of FX strategy at Westpac, the eruption in US-China friction does not materially alter their USD thinking and in any case it has not affected the DXY much either way.

Key Quotes

“It has been enjoying a slow grind higher all year regardless whether trade tensions were subsiding as they were through Q1 or more recently when trade tensions resumed. In much the same vein, while there are some pockets of weakness in the economy and a sense that the fiscal stimulus is waning, the US growth divergence story is still intact regardless of trade tensions. Against that, Brexit, a likely renewed budget clash between Italy and the EU and wider EU elections this weekend all cast the USD in a more relatively attractive light.”

“Market pricing for a 25bp Fed cut by year’s end and an additional follow up easing by July 2020 remains overdone; most Fed members agree that the recent slowing in core PCE inflation from 2% to 1.6% is mostly ‘transitory” and with unemployment still falling, many FOMC members will conclude the economy is still operating above potential and does not need an insurance cut. USD upside continues to beckon.”