USD: Defensive near term - Westpac
In view of Richard Franulovich, head of FX strategy at Westpac, USD has mostly resisted the fall in yields but a more cautious Fed will challenge that stance next week.
“Powell likely stresses data dependence amid the proximity of neutral. The dots may be arranged in a slightly more dovish direction too. The median for 3 hikes in 2019 is somewhat fragile - a downward revision from just two members on the median would push that year’s median down to two hikes from three.”
“The slowing momentum in US housing will take some time to stabilise too; higher rates and less favourable tax treatment for homeownership under the Trump tax plan are key ongoing negatives.”
“The sense of moderation could extend into Q1 2019 given the well documented statistical bias toward underwhelming activity data early in the new year. That, and diminished Italian budget risks likely cement a cautious DXY profile into year’s end and early 2019.”
“However, calls for a peak in the USD’s multi-year run up in 2019 will prove premature.”
“DXY likely defensive near term, but weakness likely extends no further than 94/95 before medium term strength resumes mid-Q1 2019.”