USD undervaluation easing – Westpac

Ebb and flow of risk appetite is clouding near term price action but underlying narrative remains thoroughly constructive with notable persistent firming in USD yield support the most eye-catching plus (EZUS 2 and 10yr spreads testing 30 year wides), solid regional PMIs providing a stark contrast to persistent easing in Eurozone PMIs, suggests Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“On the cautionary side, an FOMC that stresses the “symmetric” nature of their inflation objective, signaling tolerance for a modest inflation overshoot, diminishes risk of a more hawkish Fed tilt. The strong likelihood that IOER is set 5bp below the Fed’s upper Fed Funds range diminishes upside risk potential to short rates too.”

“USD index has finally reached minimum retracement targets for the bigger 15 mth decline around 94 and not coincidentally, scale of USD undervaluation is easing. Altogether, preconditions for USD two-way falling into place but bullish undertow persists.”