Westpac: The US dollars weakness won't last


The Pound, Euro and Aussie dollar all shot higher after the FOMC statement last night, read as dovish by forex traders. The view seems to be that even though the Fed is on track to hike rates in 2015, perhaps twice, it’s still quite a recalcitrant hiker.

But Westpac’s US based currency strategist Richard Franulovich sent a note to clients saying the US dollar weakness won’t last.

The USD may be trading with a soft tone in the wake of today’s FOMC but the milieu looks more supportive with each passing day:

  • The cadence of the US data should continue to improve as signaled by the formal trough (at least according to our modeling work) in our US data surprise index;
  • The EUR supportive bund sell-off appears to have run its course, certainly historical analogs such as the 2003 JGB sell off-off and the 2013 US treasury taper tantrum suggest we have finally approached the minimum time frame for thinking about some moderation in the pace of the sell-off with yields typically stabilising after rising 100p or so two-three months after they bottomed and;
  • EUR/USD has plenty of downside potential if/when the Greek sovereign risk premium is more thoroughly discounted by currency markets, as is increasingly the case in vol and fixed income markets across Europe.

If Franulovich is correct then the Aussie dollar, along with other currencies, should turn lower once again as the US dollar strengthens.

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