USD: Can the divergence from other Trump reflation trades be sustained? - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to remain on the defensive in the Asian trading session with the dollar index testing support at the 100.00-level.

Key Quotes

“The ongoing weakness in the US dollar stands in contrast with renewed evidence of upward momentum in other Trump reflation trades. The US equity market’s rally since the election of President Trump has continued to extend to new record highs with the Dow Jones Industrial Average rising above key technical resistance at the 20,000-level.”

“The US government bond market also finds itself back under selling pressure which is lifting yields towards their highs from during the middle of December. The rise in marketbased measures of inflation expectations remains relentless keeping upward pressure on yields especially at the long end of the curve. By just focusing on the performance of the US dollar one could incorrectly conclude that there has been a loss of confidence in Trump reflation trades, but that appears far from the truth on broader inspection.”

“The recent shift in the market’s focus on to the more protectionist trade policies of President Trump and his comments signalling concern over the strength of the US dollar have clearly contributed towards its recent underperformance. Momentum remains in favour of further US dollar weakness in the near-term which could accelerate further if key support for the dollar index at the 100.00-level is broken. It potentially could lead to a more attractively valued US dollar in the near-term. However, we don’t believe that the current weakening trend and its divergence from the broader Trump reflation trades can be sustained. If US yields continue to head higher they will encourage a stronger US dollar bringing an end to the current correction lower.”