USD: Ongoing weakness - Westpac

The USD’s failure to capitalise on a much stronger than expected Jan core CPI (0.349%, just a pinch from +0.4%, a monthly gain not seen in 16yrs), cements ongoing USD weakness, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“The breakdown in deeply entrenched fundamental linkages that hold near axiomatic status, namely the link between the USD and US yields, might not be the mystery many believe. Inflation expectations priced into breakevens and the term premium account for an outsized share of the rise in nominal yields lately (i.e. not all the rise in yields is genuinely USD positive). Much of the rise in term premiums coincides with heightened deficit risks too, following the two-year $300bn budget bill that puts the US deficit on course to hit 4.5-5.0% of GDP this year.”

“US wage and inflation pressures might be stronger than elsewhere but GDP growth, confidence and employment across much of the G10 matches US gains. USD outlook remains negative.”