USD: Grinding lower mainly due to the unwinding of Trump trades - 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 plus the overhang of extreme long speculative positioning in US dollar (although that’s now being pared), but more recently due to the unwinding of Trump trades.

Key Quotes

“Fading hopes of early policy action have been transformed into risk aversion as political tensions with Congress have materially escalated. What had been a political distraction for markets has now become disruptive, driving US yields and the USD lower. Although the impact on hard data would only occur if the disruption becomes truly destructive of US growth, sentiment indicators are likely to follow the slide in equities and keep USD under pressure.”

“In this week’s event calendar we have Fed regional surveys for May, April new (23rd) and existing (24th) home sales, FOMC minutes (24th), Markit flash May PMI (24th), and the 2nd estimate of 1Q GDP (26th).”

“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.

Our medium-term core view of a rising US dollar is based on normal service resuming (political risks dissipating) and US growth and therefore interest rates and the US dollar resuming the trend rise witnessed in 2016.”