USD looks constructive medium term – Westpac

Strategists at Westpac argued the outlook for the greenback remains constructive in the medium term.

Key Quotes

“Fed officials, even doves like Rosengren and Kaplan, are signaling that June is live and 2-3 rate hikes "make sense". That, along with strong April retail sales, resuscitating Q2 growth hopes and a surge in the April CPI that was more than just a gasoline story, has seen interest rate markets finally "get the message", June Fed hike probabilities having risen from near zero to 15% in recent days, while the yield curve is at its flattest levels since 2007 and the Bund-Tsy 2yr spread is pushing in the USD's favour again”.

“FOMC minutes this week and a long list of Fedspeakers in the next two weeks including Chair Yellen, Deputy Chair Fischer, Dudley, Tarullo, Bullard, Williams, Harker, Kaplan and Powell should see June hike probabilities continue to firm, probably toward 25% before they stabilise”.

“Highly doubtful that the USD will continue to ignore that. Upside risks to the USD should not extend much beyond May payrolls (3 June) though, striking Verizon workers and auto supply disruptions after the Kumamoto earthquake could see May payrolls print as low as 100k”.

“Short term indicators pointing to DXY lower while medium term picture looks more positive”.