USD: Defused near term upside potential - Westpac

A steadier yuan, triggered PBOC intervention, and subsiding Merkel coalition break-up risks (arguably temporary) have defused near term upside USD potential, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“The underlying positive USD backdrop though is intact: US data outperformance persists, cementing US growth leadership and relatively more robust growth stories amid growing trade tensions.”

“That said, an elevated US data surprise index and notably long USD positioning are also cautionary reversion signals for the USD. But that is a story for another time; a strong manufacturing ISM could be replicated on the services side, partial June data points to another solid payrolls, with earnings likely to be firm and near their recent cycle highs at 2.8%, while the FOMC minutes could air the prospect of a period of “above neutral” rates.”

“Trade tensions are unlikely to ease anytime soon; approaching midterms argue against a more conciliatory approach and regardless, the administration is employing the “North Korean model” on trade negotiations (i.e. coerce negotiation via aggressive escalation). “