USD: Room for further gains into the FOMC statement - Westpac

Sean Callow, Research Analyst at Westpac, suggests that it seems FX markets are entering the third clear phase since the US election in November and there is probably room for further USD gains into the FOMC statement, where Yellen should reiterate the baseline of 3 hikes this year (pricing is still nearer 2.5).

Key Quotes

“From election day to year-end, the US dollar surged, backed by a steep rise in Treasury yields as markets anticipated stronger US growth, higher inflation and wider budget deficits. Reinforcing the USD rally was a Fed rate hike on 15 December. AUD was the weakest major currency in this period.”

“From early January (Phase 2), the US dollar started to falter, again in line with the bond market (equities showed no such qualms). The 10 year T-note yield tested the 2.30% area several times in Jan-Feb, a decent pullback from the 15 December high around 2.64%. Dollar Index fell more than 4% by early February. This phase appeared to be driven by a cooling of expectations over the timing and composition of US fiscal stimulus. AUD was the clear outperformer in this period, with further backing by renewed strength in key commodity prices.”

“The third phase which arguably started on 1 March has not been about President Trump’s plans but the Fed’s. Chair Yellen’s speech on Friday sealed the case for a 15 March hike to 0.75-1.00%, a move previously priced in for June. AUD is second-weakest in the G10 so far in March (at -2.0%) despite only a moderate pullback in commodity prices and Australia’s strong GDP report.”

“AUD/USD could well give up half of its 2017 gains by testing 0.7450. The rest of the G10 is also likely to struggle short term, though positioning could slow USD gains.”