USD: Major currency doldrums - AmpGFX

It is not clear that the USD will immediately break out of its doldrums this year and has continued to broadly slide despite the Fed persisting with its gradual policy normalization, explains the research team at Amplifying Global FX Capital. 

Key Quotes

“This reflects doubts over the sustained strength in the US economy.  The Fed remains relative optimistic, but it still only described the growth rate as moderate.  In the meantime, there are pockets of weakness, such as weak auto sales.  Auto financing has tightened up and new and used car prices have been falling this year, helping contribute to lower US inflation outcomes.”

“Inflation readings in the US have plunged in recent months, and despite the willingness of the Fed to look through the data, the market is not so sanguine.  US rates and yields still ended lower on Wednesday, as the Fed statement did not fully offset the weaker retail sales and CPI inflation data earlier in the day.”

“Political risks in the US remain heightened as President Trump’s administration struggles to overcome investigations and courts controversy.  An approaching debt ceiling issue and a failure to pass any significant legislation in Congress have arguably weakened global investor confidence in US assets and the USD.”

“As investors look for alternatives, they may be moving exposure towards Europe and Japan, but interest rates in these currency regions are embedded below zero discouraging exposure.  The GBP is suffering from fallout from Brexit now dampening its economy.  It is facing increasing uncertainty since the national election weakened the mandate for PM May to lead Brexit negotiations.  As such, EM currencies, and even commodity currencies, have tended to perform well.”

“The Fed policy stance should help stabilize the USD, although ultimately the Fed will respond to evolving economic conditions. We see a potential for the market to turn more mixed on EM currencies as it contemplates higher risks for equity markets, further Fed hikes, and Fed balance sheet unwinding.”

“A more hawkish Fed, contributing to curve flattening, and a peaking in tech shares, may lend more support to the JPY as a safe haven alternative.”