USD: More legs to the yield-fuelled rally - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that the US yields may be up sharply since Trump’s win (+80bp) but historical analogues (taper tantrum & QE2) suggest yields could rise at least +100bp over 6-12mths.

Key Quotes

“The Fed can lead market pricing higher still too - 3 hikes may be their base case for 2017 but that does not fully factor in a potential fiscal stimulus. In short there’s more legs to the yield-fuelled USD rally. Another HIA-style repatriation of foreign earnings, a more hawkish Fed as Trump fills 2 governor vacancies in 2017 as well as the Chair and Vice-Chair in 2018, and a rolling run of 2017 European political risks (Dutch, German and French elections), should all sustain USD strength well into 2017.”

“The caution is that details on a fiscal package are unlikely to be forthcoming for a few weeks, probably Trump’s 20 Jan 2017 inauguration and our US data surprise index is very extended. Cooler Nov retail sales was arguably an early signal of a trend shift on this front.”