Twin deficit concerns are driving the USD lower - Westpac

Markets have looked beyond the impacts of Trump’s stimulus on growth to the risks of double deficits expanding, which has added to the recent weakening USD trend - until this past week, explains Tim Riddell, Research Analyst at Westpac.

Key Quotes

“A stabilising of stock markets has coincided with a notable flattening of US 2-10’s as markets seem to be to pricing the potential of a more active Fed due to potential inflationary pressure.”

“The potential of more active Fed has also seen consolidation in the 2’s-5’s US vs EU spread (which gained more attention after Gavyn Davies’ FT article highlighted its correlation to EUR/USD) as markets also ponder upon less near term potential from ECB. Deficit risks are likely to resume into US trade data on 27th, but, in the interim, this shift in CB focus may allow further USD rebounds whilst spreads consolidate.”

“Twin deficit concerns linger and are driving the USD lower. Longer term, if our expectation for 5 Fed hikes by the end of 2019 proves correct (with upside risks to this view), then USD will strengthen.”