USD struggles to capitalize on stronger data - Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 22, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Richard Franulovich, analyst at Westpac explained that the key leading indicators in the US, such as the regional PMIs, are rising strongly and their US data surprise index has some distance to run higher before it tops out.

    Key Quotes:

    "The handful of regional US business surveys released so far for March – NY Empire, Philly and Richmond - have all posted an aggressive bounce.

    To recap, the Empire headline index rose from -16.6 to +0.6 in March, the Philly Fed index rose from -2.8 to +12.4 while today’s Richmond Fed index rose from -4 to +22. See slide below. That puts the Empire survey at 8 month highs, the Philly Fed index at 13 month highs and the Richmond index and near 6 year highs, all but completely reversing the soggy recessionary readings of the last year.

    The breadth of the stronger March readings – apparent across all these regional surveys – points to a genuine signal rather than statistical noise. The signal is exceedingly strong too, an unweighted rolling 5 year average z-score of these three regional surveys recovered from -1.3 to +1.2 in just one month – the biggest one month turnaround by a very comfortable margin. A few factors may be at work including the modestly weaker USD, stability in energy markets and signs that the Q4 inventory rundown fading.

    Our US data surprise index shows a handy recovery to the complexion of the US data has already played out in recent weeks. The aforementioned recovery in various regional PMIs suggests further legs to this story, certainly the Chicago and ISM PMIs should be firmer in coming weeks.

    Less tight financial conditions add yet more weight to this theme. Our high frequency US financial conditions index, based on equities, mortgage rates, credit spreads, bank funding spreads, M1 and the yield curve has posted a decent recovery and typically leads our US data pulse by a good 12 weeks.

    The USD has struggled to capitalise on the stronger data trends, the dovish Fed signal a key factor. But, if developments a year ago are anything to go by it won’t last long.

    In a near carbon copy with recent developments, the FOMC sent a much more dovish than expected signal on monetary policy and the US economy in March 2015. The dovish statement at the time, along with lower growth and inflation projections and a dovish tilt to the dot plot sent the USD sharply lower and helped boost risk appetite and commodity prices deep into 2015Q2. That occurred even though the complexion of the US data started to firm through much of 2015Q2 according to both our US data pulse and our US data surprise index.

    By late Q2, amid a much improved trend in payrolls and a stabilisation in commodity prices/inflation expectations, among other things, Fed anxiety waned and expectations for normalisation were back on track. At that point the USD finally stabilised. A sharp surge in risk aversion in August 2015 upset this story but the broader point still holds - Fed anxiety should wane as the data continues to recover and the USD should eventually start to more forcefully benefit from improving data."
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