USD resilience could be here for a while – Westpac

Richard Franulovich, head of FX strategy at Westpac, suggests that they continue to explore the USD’s impressive resilience versus G10 peers despite the Fed’s shift to a neutral stance and a decline in the USD’s short term yield advantage, albeit from very high levels.

Key Quotes

“At least one source of resilience comes from the long end of the bond curve; while US yields have fallen considerably 10yr yield spreads have not fallen as much as 2yr yield spreads.”

“A bigger picture look at the USD and yield spreads around the end of previous tightening cycles shows that that historically yield spreads do tend to eventually move against the USD as we move further and further beyond the last hike in a tightening cycle.”

“USD tends to exhibit a lot of late cycle strength – that is, persistent appreciation even after the last Fed hike has been delivered across multiple previous tightening cycles.”

“The flat US yield curve is of course a notable feature of the current landscape too and it is often associated with USD strength.”

“The net takeaway is that USD resilience despite the Fed pause is not such a mystery. The aforementioned correlations, curve trends and historical anecdotes tend to play out over many months too implying USD resilience could be a defining feature for many months yet.”