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USD risks towards year-end? - Westpac

FXStreet (Bali) - According to Richard Franulovich, FX Strategist at Westpac, there are some risks of the USD under-performing to be aware of as we move towards year-end.

Key Quotes

"We remain constructive on the USD's prospects, especially vs EUR. Our model, technical and macro signals in our "High Conviction FX Trades" are skewed against EUR/USD and have us short from 1.2435. There are however a couple risks on the horizon that may tip the balance in favour of a more stable EUR/USD into year's end before trend weakness resumes in early 2015."

"A yawning gap opened between US data trends (strong) and Eurozone data trends (weak) in recent months, so much so that the differential between the two regions hit its widest levels in at least 17 years. Today's relatively stronger US data vis a vis the Eurozone suggests there remains substantial momentum to this theme. That said, there's no denying the strong mean reversion tendencies in our surprise indices either. Every episode of extreme US data outperformance has been susbsequently followed by an episode of data underperformance."

"Beyond that, there is the calendar year end propensity for the USD trade slugglishly. Over both the last 10 and 35 year's the USD index has fallen a median 0.5% in December, making the run into calendar year's end one of the worst periods for the USD. We wouldn't get too carried away. After all, weather, data surprises and seasonals are highly stochastic processes. That said when blended together the risks are such that they bear watching. If realised they may produce a more stable EUR/USD into year's end, before trend weakness resumes in 2015 as the divergence in the Fed and ECB's policy stance continues to grow."

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