USD: Good case for a tactical long - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that it’s a good case for a tactical USD long into the Mar 20/21 FOMC, as the forces driving yields shift to a more USD “friendly” catalyst, namely increased expectations for terminal Fed Funds/r* after Powell’s hawkish testimony where he shifted the emphasis to, “avoiding an overheated economy” (vs Yellen’s “sustaining a healthy labor market”, Nov 2017 testimony) and noted that, “My personal outlook for the economy has strengthened.”

Key Quotes

“By contrast, a rising term premium, driven by fiscal deficit concerns accounted disproportionately for the increase in yields through Jan/Feb.”

“Feb payrolls key risk next week. Jan earnings were strong and a key driver of the surge in volatility in early Feb. But minimum wage increases across 19 states and a sharp decline in hours worked due to weather won’t be present in the Feb report.”

“DXY 91 represents a notable technical pivot, through which the USD bias will shift to a notably more upbeat tone.”