USD still lacks appeal – Westpac

USD still lacks appeal, the currency failing to capitalise yet again on the latest firming in yield spreads, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“Decent US data trends vs weaker EZ data including notably, six year lows for the German ZEW and downward revisions to region wide inflation, have pushed the 2yr BundTsy spread to almost 300bp, a new record wide at least as far back as 1987.”

“It appears these trends at most have merely constrained EUR/USD’s upward momentum – as the slide over shows, relative data trends, yield spreads and EUR/USD are closely linked, but not as first order drivers of EUR’s level – instead the influence plays out on a rate of change, 1st derivative basis. The switch from steady USD depreciation in Dec/Jan to more rangebound (88-91) tone lately is perfectly consistent with US data and yield outperformance.”

“Real time activity trackers such as Atlanta Fed peg Q1 at a sub-consensus 2.0%, while partial indicators flag yet another benign ECI.”