USD gains are likely to extend - Westpac

Richard Franulovich, Research Analyst at Westpac, expects that the yield fuelled USD gains are likely to extend into the Italian referendum (4 Dec), ECB (8 Dec) and FOMC (14 Dec).

Key Quotes

“Though some caution warranted over the potential for a replay of Dec 2015 where a similar mix of key central bank event risk saw the USD post healthy gains into the Dec 2015 ECB and Fed meetings only for a sharp reversal to playout in their immediate wake. Fast forward to Dec 2016 - the ECB could underwhelm on QE extension while the Fed is more likely than not to deliver a (fully priced) “dovish” hike.”

“USD weakness likely to be brief though given various other tailwinds into 2017: 1) another potential HIA; 2) a more hawkish composition to the Fed’s Board when Trump fills two vacancies; and 3) “EMU break-up tail risks” due to 2017 European elections.”

“Key risk to an otherwise punchy outlook that targets a USD index at 105 on a 6- 12mth horizon - a mercantilist Trump administration starts talking down the USD as the higher currency and yields damage housing and manufacturing.”