USD: Too soon to call a top in the post-election rally - Westpac

Sean Callow, Research Analyst at Westpac, notes that the US dollar price action has become more two-way since Thanksgiving but it is clearly too soon to call a top in the post-election USD rally.

Key Quotes

“The 10 basis point surge in the 10 year Treasury note yield on Wednesday rattled a range of currencies though JPY and AUD were weakest in the G10. With the early week calm shattered, it seems we are in for further volatility and underlying US dollar resilience at least until the 14 December FOMC meeting.”

“Strong data helped USD’s cause, with the ADP private payrolls survey raising hopes for the official data Friday and the Chicago PMI surging. Earlier in the week we saw consumer confidence reach a high since 2007. But the main focus for markets remains on politics. After all, the USD rally is heavily reliant on the yield surge from 1.85% on the 10 year on Election Day to near 2.40% over the past week. If there is new information on the assumptions underlying sharply higher bond yields then it makes sense for USD to react.”

“President-elect Trump’s choice for Treasury secretary, his campaign finance chair Steven Mnuchin, encouraged the dollar bulls by promising huge corporate tax cuts including a tax break to encourage repatriation of foreign profits. A similar deal under GW Bush helped support USD. But as Rich discusses on p12, there remains considerable doubt over the size of any infrastructure spending and its economic impact.”

“So while there is little debate that US yields and USD should be higher than pre-election (wider deficits seem a given), there is plenty of scope to argue over just how much higher. The Fed’s outlook on 2017 as it (surely!) raises rates this month could well define the mood into yearend. But in the week ahead, we are likely to see persistent volatility around underlying USD strength. This should keep AUD/USD well below fair value estimates and Dollar Index well supported.”