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USD best of a bad lot? - Westpac

FXStreet (Barcelona) - Sean Callow of Westpac notes the US dollar story as seeming to be evolving from broadbased strength to more selective USD bullishness.

Key Quotes

“A week ago, AUD/USD was probing the mid-0.85s, printing lows since July 2010. Some analysts were painting a positive US story based on the end of Fed QE and even claiming the midterm elections were a driver. We can largely discount the latter but it is indeed hard to ignore the divergence between the Fed’s policy outlook and that of the Bank of Japan and the European Central Bank.”

“While data on speculative positioning in futures markets shows investors are already heavily short EUR (especially) and JPY, price action and divergent economic fundamentals argue for only limited bounces in EUR and JPY into year-end.”

“Specs can remain short these currencies against the US dollar, knowing they have the blessing of the respective central banks and without great danger that the Eurozone or Japanese economies will suddenly spring to life and overturn the monetary policy outlook.”

“Adding EUR, JPY and CHF, we have accounted for 74.8% of the Dollar Index. With UK growth forecasts also lowered, it is hard to see the BoE rushing to raise interest rates. We expect this outlook to chip away at GBP/USD and also sterling on crosses. So that brings us to 86.7% of Dollar Index.”

“With that backdrop, we retain our existing positive bias on DXY over the week ahead, 1 month and 3 months, with 87 likely to be strong support.”

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