USD still enjoys a healthy yield advantage – Westpac

According to Richard Franulovich, head of FX strategy at Westpac, the USD index continues to dwell in a mild, albeit choppy, uptrend though the latest price action highlights a currency easing back to the lower side of that uptrend channel as surging trade risks drive a flight to safer havens.

Key Quotes

“DXY weighted yield spreads have admittedly moved sharply against the USD too; the 2yr spread currently +165bp vs 200bp late July. But it’s not clear further meaningful erosion is on the cards; OIS markets already price in a strong chance of a 50bp Fed cut Sep 18 (-37bp), pressure is building for Draghi to act decisively (Sep 12) and Oct 31 Brexit uncertainty likely to weigh more on bund yields than USTs.”

“Latest escalation of US-China trade tensions and related surge in volatility likely to show up in a range of US PMIs and surveys in coming weeks but the USD remains in generally good shape, even as FX intervention concerns continue to fester; the underlying US growth story remains steadier than elsewhere and a range of key central banks globally are increasingly adopting aggressive dovish tilts.”