USD: Favoured high conviction long - Westpac

Research Team at Westpac, suggests that their model, macro and technical scores lurch aggressively toward the USD, as one might have expected with US growth and inflation expectations undergoing a major shack-up in the wake of Trump’s victory.

Key Quotes

“The USD rally likely continues into early 2017 assuming Trump continues to sound more mainstream and when more detail on a fiscal stimulus that can pass Congress takes shape. Non-negligible chance that infrastructure spending is back-loaded, certainly large swathes of the Republican party are not enthused by infrastructure, leaving tax cuts to do the heavy lifting initially.”

“High propensity to save some of the windfall implies the growth impact may be muted. That should take steam out of the USD but there’s no shortage of other USD tailwinds that should see strength sustained well into 2017 including; 1) another potential Homeland Investment Act allowing multinationals to repatriate offshore earnings (the stock amounts to USD2.4trn); 2) a likely more hawkish composition to the Fed’s Board (there are still two vacant Governor seats); and 3) a rolling series of European political events (Italian referendum in Dec 2016 and Dutch, French and German elections in 2017) which carry high risks of a populist backlash.”

“Technical: The 100.40 high in place since early 2015 may cap interim gains, but bias is for a break through, confirmed above 100.70, to trigger moves towards a series of targets in the broad 101.45-102.65 area or even towards 103.25-35. A close below 99.35 is needed to offset current upside bias.”