USD: Weak positioning has started to reduce - Westpac

Imre Speizer, Research Analyst at Westpac, suggests that there are signs, which shows that weak USD positioning has started to reduce, but it has some way to go before reaching a neutral state.

Key Quotes

“The US dollar has continued to grind lower this year, partly due to a soft patch in the US economy in Q1 (although the Fed has deemed it “transitory”). Also acting as a headwind has been the overhang of extreme long speculative positioning in US dollar index futures. There were signs such positioning has started to reduce, but it has some way to go before reaching a neutral state.”

“In this week’s event calendar, April retail sales and CPI are the main data points of note. Weak April auto sales raise some early concerns that sluggish Q1 consumer spending might extend into Q2 – the retail data is thus key to some clarity. Fedspeak includes Bullard, Mester, Rosengren, Kaplan, Dudley and Evans.”

“3 months ahead: An upbeat Fed that is eager to look past near term economic weakness and a likely decent April payrolls should cement June Fed hike odds into an 80%-90% range. As it is, the USD is undervalued relative to yield spreads. We would not get too carried away with upside USD index potential beyond 101/102 however: our US data surprise index has yet to hit extreme lows that signal all the bad news is out and base effects turn less supportive on the oil/inflation front in coming months too, a factor that is likely to keep inflation shy of the Fed’s 2% goal.

That said, by year-end, NZ-US interest rates spreads should be much lower, and the Fed’s intentions regarding balance sheet normalisation should be clearer. Markets should eventually start to price balance sheet shrinkage into the US dollar.”