USD: Just a pause in the upswing? - Westpac

Sean Callow, Research Analyst at Westpac, expects USD to soften a little further near term as such unease continues to grow.

Key Quotes

“AUD/USD looks to be a key beneficiary of this move, set to probe above 0.75 near term. Yet with every indication that Trump is serious about taking strong protectionist action against China, AUD will remain at risk of becoming collateral damage of a US-China trade war over the course of 2017. It is difficult to see AUD/USD spending much time above 0.75, especially with USD downside ultimately limited by Fed tightening expectations in the months ahead.”

“President-elect Trump’s news conference has left many questions unanswered for markets. In particular, there is much interest in the size, mix and timing of any fiscal easing. Will the looser policy be mostly cuts to corporate and high income tax rates? Will infrastructure renewal be via direct government spending (as bond yields seem to imply) or reliant on tax breaks for the private sector (as nominees have suggested). Is there likely to be a tax holiday on repatriated profits? What steps will be taken to slow imports from Mexico and China?”

“Perhaps investors were naïve to expect clarity at the press conference. We are keen to hear from Treasury secretary nominee Steven Mnuchin at his nomination hearing, likely late this month. In the meantime, the steep rise in US yields that underpinned the US dollar after the election is faltering. The US 10 year bond yield has trended lower since the 14 Dec FOMC meeting, warning the likes of USD/JPY that the post-election rally could have been excessive.”