US narrative should be dollar-supportive – Westpac

Sean Callow, Research Analyst at Westpac, points out that a week ago they had suggested that the US dollar looked to be “on a better footing in the week ahead” which “could help keep a lid on AUD/USD on probes above 0.80” and it seems a reasonable view to retain short term.

Key Quotes

“In particular, last week we noted the unexpected removal of Sep political risk around the US debt ceiling and government funding, as President Trump reached an agreement with Democratic leadership. Funding the government will return as a risk for markets ahead of 8 December but the debt ceiling – currently suspended - won’t need to be raised until perhaps March or later, by which point it will be a long way north of US$20 trillion.”

“Trump’s deal with Democrats may not be a one-off, with the White House describing a Trump-Schumer-Pelosi dinner on Wed as focusing on “tax reform, border security, DACA, infrastructure and trade.“ When markets hear “tax reform”, they assume corporate tax cuts and indeed Trump and Treasury Secretary Mnuchin have been stressing their desire to cut the headline rate as far as 15%.”

“US equities this year seem to have been pricing delivery of substantial tax cuts and this week duly printed yet more record highs. But bond markets have been much gloomier, with the 10 year Treasury note yield heading into last weekend close to 2.00%, a low since the Nov 2016 election. As the chart shows, this week’s jump in yields has fitted closely with USD/JPY.”

“The dollar has also posted gains against virtually all the G10 (it is flat vs GBP) so far this week, with the Swiss franc almost as weak as the yen. The weakness of safe havens fits the reduced tensions over North Korea and less US hurricane damage than feared.”

“So the US narrative should be dollar-supportive – at least until the FOMC meeting. Potential for a dovish tilt in quarterly forecasts could at least interrupt the dollar’s recovery of lost ground.”