USD recovery has some way to run - Westpac

The US dollar has had another good week and its gains are not quite as broad-based as in late April, with a couple of major currencies up over the past week (CAD and KRW), according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“The 10 year treasury note yield has steadied around 3%, after its steep rise in April. But USD price action around the FOMC statement this week reinforces our view that the dollar recovery has some way to run.”

“The FOMC statement could easily have been taken as leaning dovish. In particular, in a statement confirming a steady hand, the word “symmetric” caught the eye. The FOMC already had a reference to its “symmetric inflation goal” in the concluding paragraph which was repeated verbatim from the 21 March meeting. But this week’s statement on the outlook added another “symmetric” to the familiar “2 percent objective”.”

“The Fed’s preferred inflation measure, the PCE deflator, rose from 1.7%yr in Feb to 2.0%yr in Mar, aided by base effects. The core PCE deflator rose from 1.6%yr to 1.9%yr. As the chart shows, there has been a clear pickup in inflation momentum this year. But the FOMC’s reminder that the 2% inflation objective is not a ceiling can be seen as a heavy hint to markets not to get excited about aggressive rate hikes if/when the PCE deflator runs above 2%.”

“Consistent with this reading, the 2 year T-note yield dropped from 2.51% to 2.49% on the statement. The US dollar also fell on the headlines but soon recovered. EUR and GBP for instance slumped to lows since midJanuary. We will hear plenty from Fed officials in the week ahead and expect their tone to be mostly upbeat, reinforcing near-100% market pricing for a June rate rise, followed by 2 more by mid-2019.”

“Market positioning suggests that this means another week of US dollar gains, though maybe some consolidation against e.g. AUD, where an optimistic RBA and potentially generous federal budget could help.”