USD: Moderation in positive factors - Westpac

Two key factors that fueled the USD’s sharp appreciation in the last month - material undervaluation and extreme short positioning - have moderated, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“Aggregate IMM leveraged short USD positions have declined too, from a peak just shy of $30bn a few weeks ago to $13.8bn as of last week.”

“Strictly speaking the fuel for further USD upside is not completely spent – the USD remains undervalued and positioning is still short USD. That said, its doubtful a moderate degree of undervaluation and moderate short positioning on their own will be enough to sustain USD appreciation at the pace it has recently enjoyed.”

“From here the USD arguably needs a hawkish reprofiling of Fed tightening expectations and a further paring back of ECB normalisation plans. Yet, the latest US average hourly earnings and core CPI data for April – both sub-trend and sub-consensus at 0.1% - suggest that the Fed can stick with a gradual path.”

“The impression of US outperformance is arguably overstated too.”