US: Momentum & positioning favour stronger USD - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a stronger footing in the Asian trading session with upward momentum likely to remain in place in the near-term.

Key Quotes

“Expectations of a significant loosening of US fiscal policy and tightening of monetary policy are providing support for a stronger US dollar. The Fed will have to take into consideration the impact of looser fiscal policy under President Trump which if it proves effective at lifting inflation and/or growth will prompt the Fed to speed up the pace of rate hikes in the coming years.”

“Fed Vice Chair Dudley has stated that “the type of fiscal stimulus probably does matter in terms of how you think about its impact on the economy and its potential impact on inflation over the medium-term”. He would welcome infrastructure spending which “presumably would increase the efficiency and productivity of the economy”. However, he warned against the adoption of more protectionist trade policies and dismantling the 2010 Dodd-Frank Act. Even before the expected boost from looser fiscal policy, Fed Vice Chair Dudley signalled that one should be “increasingly optimistic” on meeting the Fed’s inflation goal which he sees as being met over the next few years.”

“St. Louis Fed President Bullard also welcomed an infrastructure investment programme which if “done properly, could provide some public infrastructure that could improve US productivity and drive medium-term growth”.”

“In the week ahead, we do not foresee any US economic data releases or events which are likely to reverse the US dollar’s upward momentum. The latest IMM report revealing positioning after the US election highlighted that long US dollar positioning has increased further but more modestly than we had expected. It leaves scope for further US dollar upside in the near-term as long positioning still remains well below levels recorded during last year.”