ND/USD: marked disagreement about where the USD is headed - ANZ

Analysts at ANZ explained that there is marked disagreement currently about where the USD is headed. 

Key Quotes:

"Since it’s the ‘big half’ of the NZD/USD equation, it matters for New Zealand.

Those arguing the USD will weaken point to the US ‘twin deficits’ – the fiscal deficit is large and will get bigger as tax cuts coincide with an infrastructure spend-up, while the current account deficit is generally expected to grow as a stretched economy meets demand through higher imports. 

In addition, the US economic data has started to look a bit softer – particularly for retail and trade. On the other hand those arguing the USD will strengthen point to the Fed’s plans to continue steadily hiking interest rates this year – the resulting yield differentials would traditionally see yield-seeking cash enter the country, pushing up the currency. 

But that traditional relationship may be tested, some argue, by the fact that – viewing Treasuries as an asset like any other for a moment – their price is currently very high, and the supply of them is set to lift (fiscal deficits) at the same time that demand is looking weaker for various reasons, including the Fed’s tapering of QE. 

Even given price falls (yield increases), demand may be muted if there is a broad expectation that prices will fall further (yields rise further) from here. Add to all that the fact that if global risk appetites were to deteriorate sharply the USD would become a safe haven, and you have a case study for why exchange rates are pretty much unforecastable."