USD: Upside potential depleting? - Westpac

Following a 4% gain in the US dollar index (DXY) since early September (its largest monthly gain this year), last week witnessed a 2% pullback, leaving the chances of a sustained recovery uncertain, according to Imre Speizer, Research Analyst at Westpac.

Key Quotes

“While there was ample upside potential for the USD as recently as a couple weeks ago, that has been depleted somewhat, with a Dec FOMC hike now almost fully priced in, and opposition among key Senate Republicans to a large tax cut on cost grounds becoming more apparent.”

“The event calendar highlights this week are the first of the Oct surveys, Empire, Philly and NAHB, none of which should ruffle the USD too much.”

“3 months ahead: Beyond a near term stumble, the USD remains in good shape. Accommodative financial conditions point to yet more upside surprises in coming months while yield spreads should gravitate in the USD’s favour as the Fed Funds rate extends its glacial ascent above other countries’ key cash rates and as the Fed’s balance sheet shrinks relative to the ECB and the BoJ’s balance sheets.”